Consumer confidence continues to recover

The FNB/BER Consumer Confidence Index (CCI) leapt by another 11 index points to a level of -12 in the fourth quarter of 2020, extending its third quarter gain of 10 index points.[1] The sudden outbreak of the COVID-19 pandemic and subsequent severe economic restrictions sent the CCI crashing from an already depressed level of -9 in the first quarter to a 35-year low of -33 during the second quarter, but the CCI has now regained most of its lost ground. Nevertheless, the latest reading of -12 constitutes the lowest festive season CCI reading since 2015, and remains well below the average CCI reading of +2 since 1994.

Details

All three sub-indices of the CCI rose handsomely during the fourth quarter. The economic outlook index rebounded by 11 index points to -12, and is now at roughly the same level compared to its 2019Q4 reading (of -14). The household financial outlook sub-index edged up by 8 index points to +6, but remains below both its first quarter level of +14 and its 2019 festive season level of +11. The sub-index measuring the appropriateness of the present time to buy durable goods (e.g. vehicles, furniture, household appliances and electronic goods) recovered by another 14 index points to -30, but remains well below its 2019Q4 level of -18.

A breakdown of the CCI per household income group shows that confidence levels improved across the board, although the low-income group (earning less than R 2 500 p.m.) again saw the largest rebound. Low-income confidence increased by 16 index points to -4, and is now only 5 index points shy of its 2019Q4 level of +1. Middle-income confidence (i.e. households with a monthly income of between R2 500 and R20 000) recovered by another 12 index points to -13, but remains well below its 2019Q4 level of -4. The confidence level of high-income consumers (earning more than R20 000 p.m.) edged up by 11 index points to -16, although this too remains very much depressed compared to the 2019 festive season level of -4.

It is also instructive to note that high-income households are, in particular, not nearly as optimistic as low-income households about the outlook for their household finances: whereas a net majority of 17% of low-income households expect their financial positions to improve over the next 12 months, only 2% net of high-income households and 4% net of middle-income households expect any improvement next year. The sharp divergence in expectations for household finances helps to explain why the confidence levels of low-income consumers are much less depressed compared to that of middle- and high-income households.

FNB Chief Economist Mamello Matikinca-Ngwenya noted that, “The further easing of restrictions and concomitant uptick in economic activity greatly benefits low-income households in South Africa, as most low-income consumers were unable to earn a living by working from home. Millions of low-income households would also have been relieved to hear that the expiration date for the COVID-19-related social grant top-ups were extended from October until the end of December 2020, while the unemployed will continue to benefit from the Social Relief of Distress (SRD) grant until January 2021.” Combined, these COVID-19 measures amount to an additional R6bn to R7bn of disposable income for poor households per month, in turn supporting the non-durable goods retail sector where low-income consumers spend the bulk of their household budgets. Slight declines in petrol and paraffin prices may also have bolstered low-income confidence somewhat during the fourth quarter.

Although discretionary spending by more affluent consumers is also expected to edge up further over the Christmas period, the size of the rebound will likely be inhibited by the adverse impacts of the coronavirus pandemic on their salaries and wages, overtime payments, commissions and end-of-the-year performance bonusses. The 300-basis-point decline in the prime interest rate since the end of 2019 would have helped to soften the blow for indebted households, but lending rates have not come down further since the last 25-basis-point cut in July.

The fourth quarter saw the time-to-buy durable goods index continue to recover, but the vast majority of consumers across all income groups still consider the present time as highly inappropriate to purchase big-ticket items such as passenger cars, household furniture and jewellery. Matikinca-Ngwenya said that, “In fact, the latest reading for the time-to-buy durable goods index of -30 is the lowest of any fourth quarter since 1984, suggesting that durable goods sales are likely to underperform significantly during this festive season.” 

Bottom line

“The rebound in consumer confidence is good news for the broader South African economy, as household consumption accounts for roughly two-thirds of South Africa’s GDP. However, the fact that the confidence levels of affluent consumers – the group with the largest spending power – are still so depressed points to a more muted recovery in overall consumer spending during the fourth quarter compared to the noticeable jump witnessed in the CCI,” said Matikinca-Ngwenya.

Non-durable goods sales are expected to outshine the other consumer spending categories heading into the New Year, but could come under significant pressure once the COVID-19-related welfare payments expire. The termination of the social grant top-ups and SRD grant therefore holds significant downside risk for both the confidence levels and spending power of low-income households. The apparent resurgence of COVID-19 infections in the Western and Eastern Cape and possible renewed restrictions could also weigh on consumer sentiment and hamper the pace of recovery in household expenditure during the first quarter of 2021.

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 switched to telephone call surveys in the third quarter of 2019.  The 500 respondents are representative of the racial and household income composition of the urban adult population of South Africa.

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.

Spokesperson: Mamello Matikinca-Ngwenya, FNB Chief Economist