South African consumers are very stressed and don’t have high hopes for an easier time in 2023, the latest FNB/BER Consumer Confidence Index (CCI) shows, but wealthier consumers, with the greatest purchasing power, are the most depressed .
After some recovery in the fourth quarter of 2022 – a jump from an index score of -20 to -8 – the index has plummeted to -23 points in the first quarter of 2023.
The reading of -23 is the third lowest CCI reading since 1994 and indicates extreme consumer concerns about South Africa’s economic outlook and household finances, according to FNB.
“The latest reading is broadly in line with the extraordinarily weak level of consumer confidence recorded during the third quarter of 2020 – also -23, at a time of Level 3 Covid restrictions, alcohol bans, school closures and curfews – as well as the second quarter of 2022, which was -25, when deadly floods devastated KZN and the economic consequences of the Ukrainian war began to manifest themselves,” FNB said.
The consumer confidence index score is expressed as a net balance and reflects consumers’ views on the economy and willingness to spend.
Low confidence indicates that consumers are concerned about the future. They may worry about job security, pay raises and bonuses. With such a state of mind, consumers tend to cut back on basic necessities (e.g. food and services) to free up income for debt service.
When confidence is high, consumers tend to go into debt (or save less) and spend more on discretionary items, such as furniture, appliances, motor vehicles, clothing, and footwear.
Expenditure on these items decreases when confidence is low, as households are generally able to delay purchases without immediate deterioration in living conditions.
According to the BER, an increase in consumer confidence reflects a greater willingness of consumers to spend. However, this willingness will only translate into actual sales if consumers’ spending power improves.
Their ability to spend depends on their inflation-adjusted after-tax income and the availability of credit. An increase in consumer confidence could therefore lead to an increase in household consumption expenditure in general and in retail and car sales in particular. The opposite is true when consumer confidence falls.
Red across the board
All three sub-indices of the CCI fell dramatically in the first quarter of 2023.
The CCI’s economic outlook and sub-indices to buy durables fell 15 and 17 index points respectively and are now both deep in negative territory at -34.
The vast majority of consumers therefore expect a deterioration in South Africa’s economic growth over the next 12 months and view the current time as highly inappropriate to buy durable goods such as vehicles, furniture, household appliances and electronic goods.
The CCI’s Household Financial Outlook sub-index fell 14 index points to -1 in the first quarter, reversing the gains made over the 2022 holiday season.
While consumers no longer expect their household finances to improve in the coming year, they are nevertheless considerably less pessimistic about their own financial outlook compared to their gloomy expectations for the economy in general.
A more detailed breakdown of the CCI shows that the confidence level of high-income households (earning more than R20,000 a month) deteriorated the most during the first quarter, from -10 to -31 index points.
Aside from the -33 reading recorded during the initially panicked Level 5 lockdown period in 2020Q2, this is the lowest high income confidence reading since the series began in 1995.
Affluent consumers are particularly concerned about the outlook for the economy, with this sub-index falling from -18 to a new all-time low of -51 in the first quarter.
The confidence level of middle-income households (earning between R5,000 and R20,000 pm) fell from -6 to -21, while the confidence level of low-income households (earning less than R5,000 pm) fell from -6 to -17 index points.
FNB chief economist Mamello Matikinca-Ngwenya said the alarming rise in power outages since December and the accompanying deterioration in South Africa’s economic outlook undoubtedly rocked consumer confidence in the first quarter.
“Spiral rising food prices, another rate hike and a sharp depreciation in the rand exchange rate probably made things worse. However, job creation in the still-recovering services sector may have softened the blow to low- and middle-income confidence,” she said.
Composite problems
The large drop in the FNB/BER Consumer Confidence Index reflects the substantial deterioration in retail confidence during the first quarter, with the BER’s Retailer Confidence Index shrinking from 42 to 34 index points, its weakest level since 2020Q2.
“The turnaround in consumer confidence points to a marked decline in consumer willingness to spend and heralds a significant slowdown in real growth in consumer spending from the surprisingly strong pace seen in the fourth quarter. recorded.
“The fact that high-income confidence has fallen the most is doubly alarming for the outlook for household spending, as affluent consumers also have the greatest purchasing power,” says Matikinca-Ngwenya.
With an increasing number of high-income households now investing – at a significant cost – in solar power and other backup power systems, these households will most likely need to reduce their discretionary spending to balance their budgets.
As a result, sales volumes of high-priced durable goods, such as new vehicles, furniture and home appliances, are likely to come under greater pressure in the coming months, although replacement purchases of electronic goods due to load shedding failures may have offset some of the adverse impact.
With upward momentum still buffering the services sector – e.g. hotels, restaurants, transport, leisure and tourism-related services – the retail sector is likely to bear the brunt of the impact of the confidence collapse.
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