LONDON — South Africans have a new hero – and they are happy to shout it out. Over the 36 years that the Bureau for Economic Research has compiled quarterly research into how consumers feel about the future, no single quarter’s improvement comes close to the 34 point surge recorded during the first three months of 2018. That extraordinary increase takes the country’s official index of consumer confidence to its highest level since the BER’s quarterly polling began in 1982. So while sceptics abound in certain sections of the the media and on the dinner party circuit, most South Africans are paying them no attention. The vast majority of citizens are ecstatic in the wake of the ANC’s December 18 decision to choose Cyril Ramaphosa over another Zuma. Ramaphoria, the Cyril Spring, call it what you will – a new mood of optimism is sweeping the young democracy. After a lost decade of Zumanomics, the nation is expecting far better. And given the low base from which economic policymaking comes, they are sure to get it. Hope has sprung. – Alec Hogg
From FNB and the Bureau for Economic Research
After hovering around -8 index points for most of 2017, the FNB/BER Consumer Confidence Index (CCI) skyrocketed to an all-time high of +26 in the first quarter of 2018.[1]Â The latest reading surpassed the previous record high of +23 index points reached in the first quarter of 2007 when the South African economy pumped out real economic growth of nearly 6%.
The 34-index point increase in the CCI is also the largest single quarter improvement in consumer sentiment since the BER started publishing a composite index of whites and blacks in 1982.[2]Â Previously, the biggest jump in the CCI occurred during the second quarter of 2004, when the CCI soared by 27 index points from -7 to +20. Although positive political and economic developments also helped to shore up consumer confidence in 2004, the announcement that South Africa would host the 2010 World Cup Soccer Tournament likely contributed significantly to the large leap in the CCI at the time.
The CCI has averaged +4 since 1994, but readings have been consistently below zero since the beginning of 2015. The fourth quarter of 2017 reading of -8 marked the longest uninterrupted negative streak (3 consecutive years) since the survey started in 1982. However, the jump to+26 index points in the first quarter of 2018 breaks this trend and indicates that most consumers are now optimistic about the outlook for the South African economy and their household finances.
Details
The complete turnabout in consumer sentiment during the first quarter can be ascribed to massive jumps in all three sub-indices of the CCI. Consumers turned very positive about the outlook for the South African economy over the next twelve months, with the economic outlook index rebounding from -2 to +34. Similarly, consumers’ rating of the financial prospects of their household soared from +2 to +31. Both the financial and economic outlook indices are now at unprecedented highs. The first quarter also saw a total reversal in consumers’ rating of the appropriateness of the present time to buy durable goods. Whereas a net majority of 24% of consumers rated the fourth quarter of 2017 as the inappropriate time to purchase durable goods (a 17-year low for the index), 13% net now rate the present as the right time to purchase durables (the highest reading since the second quarter of 2006).
| 16Q1 | 16Q2 | 16Q3 | 16Q4 | 17Q1 | 17Q2 | 17Q3* | 17Q4 | 18Q1 | |
| Overall FNB/BER CCI | -9 | -11 | -3 | -10 | -5 | -9 | -9 | -8 | 26 |
| Economic outlook | -14 | -17 | -4 | -23 | -1 | -22 | -12 | -2 | 34 |
| Household financial outlook | 10 | 4 | 16 | 6 | 3 | 6 | 4 | 2 | 31 |
| Suitability of the present time to buy durable goods | -22 | -19 | -21 | -13 | -17 | -12 | -18 | -24 | 13 |
*The third quarter data points were imputed as the average of the second and fourth quarters.
A breakdown of the CCI according to household income and race shows that consumer confidence surged across all income and population groups during the first quarter of 2018. The CCI indices for high income, middle income and low income households all jumped by between 30 and 34 index points during the first quarter[3]. The CCI for high income earners (earning more than R14Â 000 per month) and middle income earners (earning between R 3 000 and R14 000 per month) reached new record highs (of +31 and +26 respectively), while the CCI for low income consumers (earning less than R3 000 per month) improved to levels last seen in 1995/6 (+13). White consumers recorded the largest increase in confidence, with a leap of 45 index points to +18 (the highest level since 1988)[4]. Black consumer confidence soared by 34 index points to +33, the second highest level since the all-time high of 38 recorded after the 1994-election.
Mamello Matikinca, chief economist of FNB, said that “The extraordinary improvement in consumer sentiment during the first quarter of 2018 can largely be ascribed to the change in the country’s leadership, which triggered many positive economic developments.” For one, the rand exchange rate has strengthened by nearly R2,50 against the US dollar since mid-November 2017 (from R14.47 to R11.90 in recent days). The sharp appreciation in the rand led to a R1 drop in the petrol price, with the price of 95 unleaded petrol at the coast falling from R14,27 per litre in December 2017 to R13,27 in March 2018. Similarly, the prices of other imported goods such as furniture, household appliances and electronic goods have also started to decline on the back of the stronger rand, bolstering the purchasing power of households.
Other positive developments since the end of 2017 that may have heartened some consumers include the government’s announcement that it would provide fee-free higher education and training for students from families with incomes less than R350 000 a year; the pushing back of “Day Zero”– the day when Cape Town’s taps were projected to run dry amidst a catastrophic three-year-long drought; as well as the cabinet reshuffle on 26 February.
The Finance Minister’s budget speech of 21 February – in which the National Treasury had to make difficult decisions to address the government’s bulging budget deficit and to fund free higher education – was also generally well received. Matikinca pointed out that “While the VAT hike to 15% would have weighed on consumer sentiment, the zero rating of basic food items such as maize meal‚ brown bread‚ dried beans and rice will mitigate the impact of this tax increase on low-income households who spend a large proportion of their household budgets on food. In addition, the Finance Ministry announced some relief for the poor and the working class in the form of above-inflation increases in social grants expenditure and below-inflation increases in personal income tax for individuals earning less than R410 000 per year.”
In light of the extraordinary large increase in consumer sentiment in the first quarter, it is important to note that two of the CCI sub-indices – the economic outlook and financial prospects indices – are forward looking in nature. Consumers are asked to give their view on the outlook for the South African economy and their household’s financial position in twelve months’ time. President Ramaphosa’s “new dawn” and pledge to turn the tide of corruption has clearly created great optimism among consumers and the business community about South Africa’s economic prospects under his leadership. Although we have already witnessed a number of positive ripple effects, it will take some time to implement investor-friendly reforms to boost economic growth and household income levels on a more enduring basis. There is therefore a risk that the CCI overshot during the first quarter on the back of the positive sentiment, implying that there could be a negative correction during the second quarter.
Indeed, after surging by 27 index points from -7 to +20 on the back of Soccer World Cup jubilation during the second quarter of 2004, the CCI subsequently backtracked by 14 index points to +6 in the third quarter of 2004. It then took another 6 months for confidence to revert back to double digit positive numbers, and this was at a time when the South African economy grew at a breakneck pace of more than 5% per year (far higher than the current growth rate of around 1%).
To be sure, there have been further positive developments since the fieldwork for the first quarter survey was conducted, including the fact that ratings agency Moody’s affirmed South Africa’s investment-grade credit rating (and revised its credit outlook to stable from negative) and a 25 basis point cut in the prime interest rate. However, the VAT hike kicked in on 1 April, the petrol price rose sharply on 4 April and the JSE All Share index has been losing ground since middle March – all of which could likely weigh on confidence during the second quarter. In addition, the current debate about expropriation of land without compensation has created some apprehension among investors and land owners in South Africa, although it probably heartened less affluent consumers.
Bottom line
The dramatic increase in consumer confidence during the first quarter of 2018 signals a substantial improvement in consumers’ willingness to spend. Indeed, the time-to-buy durable goods sub-index of the CCI saw the largest improvement (37 index points), entering positive territory for the first time since the 2008/09 global financial crisis. Matikinca noted that “In addition to improved consumer confidence levels, the sharp appreciation in the rand exchange rate and lower import prices, the cut in the prime interest rate and the gradual recovery in credit extension all favour the durable goods category. To be sure, the latest retail sales data from Statistics South Africa shows that furniture and household appliances prices were 5% lower in January 2018 compared to the same time last year, while sales volumes were up by 9.2% year-on-year – by far the best performing retail sales category in terms of volume growth.”
Semi-durable goods retailers (e.g. clothing, footwear, toys and sporting equipment) are also expected to benefit from lower price inflation and stronger credit growth, but the economic recovery would need to gain further momentum to move the needle on the much larger non-durable goods and services categories of consumer spending. (These categories typically have a smaller import content and lower credit sensitivity.) The tightening in fiscal policy will inhibit the pace of household expenditure growth – and we expect to see some correction in consumer confidence levels following the unparalleled surge recorded in the first quarter – but it seems as though the seeds of economic recovery have finally been planted.
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.
The FNB/BER CCI is based on face-to-face interviews of between 2Â 000 and 2Â 500 urban adults. In the past the BER has exclusively used Nielsen, a reputable international market research firm, to conduct these interviews and ensure consistency over time. However, since 2016 Nielsen, for a number of reasons, has not been conducting surveys every quarter. To prevent a break in the long historical time series, the BER added the CCI questions to the bi-annual surveys of Ipsos Markinor and TNS Kantar to estimate the CCI. Although different service providers conduct the interviews, the results remain consistent given that the survey method (e.g. sampling and interviewing) agrees closely. TNS conducted the fieldwork for the first quarter survey between 26 February and 8 March 2018.
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.
Surge in consumer confidence reflects #Ramaprogress
PwC’s baseline scenario for SA is taking shape
By Christie Viljoen, PwC Economist
The Bureau for Economic Research (BER) reported on April 25th that South African consumer confidence rebounded during the first quarter of 2o18. In fact, sentiment jumped to the highest on record during the period. The improvement between 2017Q4 and 2018Q1 was also the largest on record, eclipsing the jump seen in 2004Q2 following the announcement that South Africa would host the 2010 FIFA World Cup.
The consumer survey was conducted between 26 February and 8 March 2018. This period followed a series of dramatic changes in South Africa’s politics and economics, including the swearing in of President Cyril Ramaphosa (15 February), the delivery of his encouraging State of the Nation Address (SONA) (16 February), and the release of the 2018/19 fiscal budget (21 February).
The BER reported that “most consumers are now optimistic about the outlook for the South African economy and their household finances.” This is not surprising. PwC’s report “Investment decisions: Why South Africa, and why now?” (released in February 2018) suggested that the appointment of President Ramaphosa could be a game changer for the South African economy.
PwC’s report narrated a baseline scenario for South Africa towards 2022, which includes consumer confidence returning to positive territory. This scenario – named #Ramaprogress – suggested that early changes made by the country’s new leader would “set in motion changes that lifted the spirits of South Africans and investors”. This is reflected in the BER’s consumer sentiment publication for 2018Q1.
Out of 26 key promises made in the SONA 2018, the new administration has so far delivered on 19 points. From a consumer perspective, these include the detailing in the 2018/19 budget on free higher education and progress on the introduction of the national minimum wage. South Africans are also encouraged by positive reports on, for example, a stabilisation in the sovereign rating.
Looking ahead, South African consumers will be looking for tangible progress on other fronts in order to sustain the rebound in sentiment. These include planned changes to the list of items that are zero-rated for value-added tax (VAT), implementation of the National Health Insurance (NHI) scheme, and job-creating dividends from the planned employment and investment summits.
