Confidence among SA consumers deteriorated in the first quarter, reaching its lowest level since the middle of 2021 when the country was grappling with the Delta variant and lockdowns, and as Russia’s war with Ukraine triggered new concerns about inflation and the outlook for growth.
An index by FNB and the Bureau for Economic Research (FNB/BER) at the University of Stellenbosch declined to -13 from -9 in the last three months of 2021, a worsening of sentiment that has come despite a stabilisation in Covid-19 cases and a further opening of the economy.
Towards the end of 2021, SA was hit hard by travel restrictions as scientists identified the highly infectious Omicron variant of Covid-19.
Instead of improving, sentiment has instead declined to levels recorded in the second quarter of 2021, when the Covid-19 social relief of distress grant was temporarily discontinued and the lethal Delta variant became dominant. Then the government tightened lockdown restrictions to level 4, the second highest, compared to level 1 now. There are now growing calls for the government to drop the national state of disaster completely.
“Despite a large drop in coronavirus infections and a welcome easing of Covid-19 regulations since December, SA consumer confidence declined because of the unfolding humanitarian crisis and the economic ramifications of the war,” FNB chief economist Mamello Matikinca-Ngwenya said.
Sentiment has taken a hard knock as the Russian invasion of Ukraine pushed crude oil to highs near $140/$, leaving SA consumers facing an increase in the petrol price to a new record of about R24/l. The conflict threatens to disrupt trade in key commodities and push up food prices, while consumers face the prospects of faster and steeper interest-rate increases from the SA Reserve Bank (Sarb) as it seeks to keep inflation within its 3%-6% target range.
Unlike S&P Global’s IHS Markit SA purchasing managers index that came in at 50.9 earlier this month, hinting at renewed expansion in the country’s private sector; and the FNB/BER confidence in the building sector survey that came out earlier this week rising six points to 40, the highest sector rebound in four years, the latest consumer confidence index shows deteriorated sentiment.
FNB said the level was well below its average since 1994, signalling a low willingness to spend or increased caution among consumers.
The release comes a week before the central bank makes its latest rates decision and may be one of the factors, with an indication that a demand-driven surge in inflation is unlikely, that policymakers consider when deciding whether to accelerate the pace of rate increases in response to the external environment. In each of its past two meetings, the monetary policy committee (MPC) raised the repo rate 25-basis points (bps) to the current 4%, having cut it in the wake of the Covid-19 outbreak to a record low 3.5%.
Allan Gray portfolio manager Thalia Petousis told Business Day low consumer confidence and anaemic local consumer demand for credit is definitely a reason that the central bank will try to look through temporary supply-side inflationary pressures that are outside its control, such as oil and rising global food prices.
Petousis said the SA consumer is not in the same boat as the US consumer, which has seen robust consumer demand for goods and apparel since the pandemic.
“That being said, I think the Sarb will raise rates at the upcoming MPC given that the repo rate is below their target for inflation of 4.5% — implying negative real yields that are no longer appropriate as we slowly emerge into a type of economic recovery — however patchy it might be at present,” said Petousis.
Nedbank senior credit research analyst Jones Gondo said Nedbank does not believe that a slump in consumer confidence is reason enough for the Sarb to turn dovish or pause the trajectory of their policy rate rising cycle.
“Higher oil prices are a supply-side shock, meaning headline inflation will spike, but core may not immediately respond. The second-round effects of these shocks are what the Sarb will want to curtail as they can be permanently backed-in to the core inflation baseline and future inflation expectations.”
“As a result we think there will be a 25 bps hike next week at the Sarb MPC,” said Gondo.
The FNB/BER consumer confidence index surveys provide regular assessments of consumer attitudes and expectations, which are then 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 data showed marked declines in respondents’ confidence about the economic outlook and their own financial position. It also showed that the majority considered the present as an inappropriate time to buy expensive durable goods — something that could be bad news for retailers as spending will remain subdued.
The confidence level of high-income households — those earning more than R20,000 per month — declined sharply from -11 to -18. That of middle-income households — those earning between R2,500 and R20,000 per month — also fell, from -9 to -11. The low-income confidence index — that of those consumers earning less than R2,500 per month — recovered from -9 to -6.
Matikinca-Ngwenya said though consumer sentiment remained downbeat across all three income groups, affluent consumers were now considerably more pessimistic, which she said could largely be explained by the alarming images of Russia’s military invasion of Ukraine, sanctions against Russia and the unfolding economic ramifications of that conflict.
“Soaring fuel prices and another 25 bps hike in the prime interest rate during the first quarter may also have started to squeeze the spending power of high- and middle-income consumers,” she said.
Update: March 17 2022
This story has been updated with additional information and comment.
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