Consumer confidence sinks to pre-Ramaphoria days – FNB/BER

Consumer confidence plunges to lowest level since 2017

FNB media statement

After holding firm amid a year of very weak economic growth and rising unemployment rates, consumer sentiment finally slumped deep into negative territory during the third quarter of 2019. The FNB/BER Consumer Confidence Index (CCI) plunged from +5 index points during the second quarter of 2019 to -7 during the third quarter.^[1] Consumer sentiment initially rocketed to a historic high of +26 at the height of Ramaphoria in the first quarter of 2018, but then started to backpedal shortly afterwards. However, for four consecutive quarters – from the third quarter of 2018 to the second quarter of 2019 – consumer sentiment remained within a fairly tight (yet positive) range of +2 and +7 index points, before capitulating during the third quarter of 2019. The latest reading of -7 index points is the lowest since the fourth quarter of 2017 (-8) and well below the long-run average reading for the CCI (of +2 since 1994).

Details

The sharp drop in the CCI during the third quarter of 2019 can mainly be ascribed to a complete reversal in the economic outlook sub-index of the CCI and a further deterioration in the time-to-buy durable goods index. Whereas the majority (11% net) of consumers expected South Africa’s economic prospects to improve in twelve months’ time during the second quarter survey, the vast majority of consumers now expect the domestic economic outlook to deteriorate further (17% net). In turn, the net majority of consumers that rated the present time as inappropriate to buy durable goods (e.g. vehicles, furniture, household appliances and electronic goods) increased from 10% to 15% during the third quarter. Finally, a slightly smaller majority of consumers expect their household finances to improve in twelve months’ time, with the household financial outlook index edging marginally lower from 13 to 12 index points during the third quarter.

FNB Economist Siphamandla Mkhwanazi said that, “A confluence of adverse economic developments in all likelihood contributed to the slump in consumer sentiment, including rapidly rising unemployment, declining real per capita incomes, news of a further massive R59 billion government bailout to Eskom, and an upsurge in xenophobic violence in South Africa. In addition, the rand has depreciated notably in recent months, while the SARB’s decision to keep the main policy interest rate unchanged in September may have disappointed indebted consumers that were hoping for another interest rate cut. Finally, consumers may also be suffering from some post-election blues – consumer confidence increased during each of South Africa’s four previous election quarters, but then declined somewhat again during the quarter following the election.”^[2]

A breakdown of the CCI according to household income group shows that consumer sentiment deteriorated significantly across all income groups, but especially so among high-income consumers. High-income consumers (earning more than R14 000 per month) not only turned pessimistic about the outlook for the economy and the appropriateness of the present time to buy durable goods, but they are also becoming increasingly concerned about the outlook for their own household finances. The net majority of high-income consumers expecting an improvement in their household finances over the next 12 months fell from +16 to +7, the lowest level in four years. Similarly, the net majority of higher-middle income consumers (earning between R8 000 and R14 000) anticipating an improvement in their household finances over the next 12 months deteriorated from +17 to +13.

In sharp contrast, low-income (earning less than R3 000 per month) and lower-middle income consumers (earning between R3 000 and R8 000) became more optimistic about the outlook for their household finances. The household financial outlook index for low-consumers improved from +9 to +13 index points, while that of the lower-middle income group jumped from +14 to +24 index points. This is the second consecutive quarter that the number of low and lower-middle income consumers expecting an improvement in their household finances has increased.

Mkhwanazi noted that “The financial position of less affluent households has in all likelihood been underpinned by the introduction of the national minimum wage in January, sustained above-inflation growth in social grants expenditure by the government, and a significant acceleration in credit extension to low income consumers. In sharp contrast, high income consumers are receiving lower bonusses, commissions and overtime payments amid weak economic growth and are likely becoming wary about the tax implications of successive government bailouts for struggling state-owned enterprises. High-income consumers, in particular, may also have been overly optimistic about what president Ramaphosa could achieve in a relatively short period of time, and some of these unrealistic expectations have now been dashed.”

The sharp fall in the FNB/BER CCI during the third quarter mirrors the nosedive in the RMB/BER business confidence index, which sank to a 20-year low of 21 index points (from 28 in the second quarter). In line with the deterioration in consumer sentiment, retailer confidence in particular took a very large hit during the third quarter – an alarming 83% of retailers surveyed in the business confidence survey said that they were dissatisfied with prevailing business conditions during the third quarter, up from 72% in the second quarter. The further deterioration in the time-to-buy durable goods sub-index of the CCI also corresponds with the marked decline in new passenger car sales during the third quarter. The rate of contraction in new car sales intensified from 0.8% year-on-year (y-o-y) during the second quarter of 2019 to 4.7% y-o-y in the third quarter, signifying that consumers are postponing their purchases of big-ticket items amid low confidence and weak disposable income growth.

Boosted by a surge in consumer confidence following president Ramaphosa’s election in the first quarter of 2018, high consumer confidence levels stood in sharp contrast to the dismal performance of the South African economy over the last 18 months (see graph above). However, the negative correction in consumer sentiment during the third quarter – coupled with the modest second quarter recovery in real GDP growth from its first quarter slump – has brought the CCI more in line with the unfortunate reality of weak economic growth.

Bottom line

Household budgets are increasingly being strained by rising unemployment – now at a 16-year high of 29% – slow wage growth, high tax rates, and soaring electricity prices. While increased borrowing seems to be helping some households to maintain a reasonable quality of life amid declining real per capita incomes, consumers are clearly postponing big-ticket purchases and slashing their discretionary spending in favour of essential expenses. “The decline in consumer confidence during the third quarter signals a further deterioration in consumers’ willingness to spend, especially among the higher income groups. Sales of new vehicles, jewellery, furniture and household appliances and other expensive luxuries are therefore expected to continue to perform poorly, while the pricing power of retailers in general will likely remain constrained during the festive season,” said Mkhwanazi.

Background

Consumer confidence surveys provide regular assessments of consumer attitudes and expectations and are used to evaluate economic trends and prospects. The surveys are designed to explore why changes in consumer expectations occur and how these changes influence consumer spending and saving decisions.

The FNB/BER CCI combines the results of three questions posed to adults in South Africa, namely the expected performance of the economy, the expected financial position of households and the rating of the appropriateness of the present time to buy durable goods, such as furniture, appliances and electronic equipment.

Until the second quarter of 2019, the FNB/BER CCI was based on face-to-face interviews of between 2 000 and 2 500 urban adults. Due to weak demand, the three service providers in South Africa – Nielsen, Ipsos Markinor and TNS Kantar – could not always guarantee surveys with a quarterly frequency between 2016 and 2019.

Internationally, the majority of CCIs are based on telephone call surveys. As a result, the BER piloted a telephone call survey in the third quarter of 2019. The fieldwork was conducted between 12 and 20 September 2019. The 500 respondents are representative of the racial and household income composition of the urban adult population of South Africa.

Ipsos conducted the customary face-to-face survey during October. These results are an independent check of the third quarter telephone call survey results. If justified, they could be used to revise the third quarter telephone call results. The third quarter results are, therefore, preliminary until the fourth quarter results are released provisionally by mid-December 2019.

Consumer confidence is expressed as a net balance. The net balance is derived as the percentage of respondents expecting an improvement / good time to buy durable goods less the percentage expecting a deterioration / bad time to buy durable goods.

A low level of confidence indicates that consumers are concerned about the future. They may be worried about job security, pay raises and bonuses. With such a frame of mind, consumers tend to cut spending to basic necessities (e.g. food and services) to free up income for debt repayment. If confidence is high, consumers tend to incur debt (or reduce savings) and increase spending on discretionary items, such as furniture, household equipment, motor vehicles, clothing and footwear. Some of these items are often financed on credit. Spending on these items declines when confidence is low, as households can generally delay their purchase without experiencing an immediate deterioration in living conditions.

A rise in consumer confidence reflects an increased willingness of consumers to spend. However, this willingness only translates into actual sales if consumers’ ability to spend improves. Their ability to spend depends on their inflation adjusted after-tax income and the availability of credit. A rise in consumer confidence could therefore result in an upturn in household consumption spending in general and retail and motor vehicle sales in particular. The opposite applies when the level of consumer confidence declines.