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Consumer confidence nosedives again.

Summary: After a slight recovery in the third quarter, First National Bank says its Consumer Confidence Index has plummeted again

After recovering from a 14.5-year low of -15 index points in Q2 2015 to -5 in Q3 2015, the FNB/ BER (Bureau for Economic Research) Consumer Confidence Index (CCI) collapsed back to -14 in Q4 2015. For the second time this year, the CCI is far lower than the lowest reading recorded during the 2008/09 global financial crisis and recession (-6). It is also only the third time since South Africa's first democratic election in 1994 that the CCI has dropped to below -12 index points. The CCI has traditionally ranged between +23 and -17 index points since 1994. This latest reading of -14 is just three index points shy of the historic low of -17 that was recorded in Q4 2000.

During Q4 2015, the financial position sub-index of the CCI declined by seven index points to +4, while the economic outlook index slumped by nine index points back to the 22-year low of -24 recorded in Q2 2015. The time to buy durable goods index plunged by 12 index points to -21, the lowest level since the 2008/09 recession (-23 in Q3 2009).

FNB said that in all, the index shows that the vast majority of consumers believe that South Africa's economic prospects will deteriorate further over the next year and that it is not a good time to buy durable goods.

According to John Loos, Household and Property Sector Strategist at FNB, strong headwinds--in the form of higher personal income taxes, poor job creation, frequent power outages, drought conditions in large parts of the country, rising interest rates and an alarming depreciation in the rand exchange rate--have been battering household income growth and consumer confidence levels since the beginning of the year.

"To be sure, the drop in petrol and paraffin prices and the respite in load-shedding bolstered consumer confidence in Q3 2015. However, the nationwide student protests over tuition fees and chaos that erupted inside and outside parliament during the Finance Minister's interim budget speech, coupled with the intensification of drought conditions and the implementation of water restrictions in some of the worst affected areas, probably weighed heavily on consumer sentiment in Q4 2015," Loos said.

In fact, with an 18 index point drop to a 13-year low level of -5 during Q4 2015, the CCI for the 16-24 year old age group booked by far the largest decline of all the age groups surveyed. The dramatic deterioration in the CCI for this age group in all likelihood reflects, among others, the disruptive impact of the student riots and sometimes violent clashes with police that occurred during the #FeesMustFall campaign. In contrast, the CCI for the 50+ year age group only declined by two index points. Nevertheless, at -24 index points--the lowest reading of all the age groups-- consumer sentiment among the 50+ year age group is extremely negative. The CCI for the 25-34 year age group also slumped by seven index points to -7 in Q4 2015, while the CCI for the 35-49 year age group dropped by 12 to -19.

Consumer confidence levels also declined sharply across all population and household income groups in Q4 2015, but the fall was particularly large for high-income households. The confidence levels of high-income consumers (making more than ZAR 14,000 a month) plunged by 15 index points to a 13-year low of -14, while higher-middle income (earning between ZAR 7,000-14,000 a month) confidence dropped by 14 index points to -12. Consumer sentiment among lower-middle income consumers (ZAR 3,000-7,000)also declined by 10 index points to -16, but the confidence levels of low income consumers (less than ZAR 3,000) remained unchanged at -13.

Loos pointed out that, "The large decline and generally low level of consumer confidence among high- and higher-middle-income consumers does not bode well for retail sales during the festive season, as these households have the greatest spending power. Higher- income consumers are currently even more concerned about their financial prospects compared to the 2008/09 recession, when easy access to unsecured credit and strong growth in government employment and public sector wages still underpinned their spending. When consumer confidence is low, households tend to postpone their durable goods

purchases and cut their spending on luxury goods and discretionary items."

Coupled with the myriad adverse economic forces that have already been hammerMYing household income growth and credit extension since the beginning of the year, low consumer confidence levels are likely to translate into weak retail sales growth during the Christmas holidays.

"Economic policymakers have already exhausted South Africa's fiscal and monetary arsenals in their bid to bolster economic growK th. Given low business confidence levels, poor job creation prospects and with food inflation now set to increase significantly on the back of the drought-induced rise in domestic grain prices and extraordinarily weak rand exchange rate, consumer spending is expected to come under even more pressure in the first half of 2016," Loos said.

Loos predicted that from recent months' real retail growth of around three per cent year-on-year, growth in 2016 to slow to nearer to the one per cent mark, more in line with South Africa's weaker economic growth as a whole.

"We could also see the Household Sector Savings rate rising over the next few years, and households become more conservative in their spending habits. This is because I have a suspicion that the weak consumer

confidence level is not just about 'the here and now'. It is also very much about the longer term economic future

of the country, which I suspect weighs heavily on many people's minds at present," Loos said.

"If anything, I suspect consumer confidence will remain this weak or even weaken further going into2016, because there exists a real risk of recession. In addition the lagged result of the past four years of economic growth slowdown is likely to be a pick-up in the pace of job loss, which normally serves to dent confidence," he concluded.

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Publication:Banker Africa
Geographic Code:6SOUT
Date:Jan 31, 2016
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