Household confidence plunges to 10-year low
Expected slowdown in spending bodes ill for economic growth
SOUTH African households’ confidence has slumped to the lowest level in 10 years, signalling a slowdown in spending.
The sector has been the engine of economic activity since the recession. If the low consumer confidence levels translate into weak spending, it bodes ill for economic growth as spending by households accounts for more than 60% of gross domestic product.
Strikes, rising inflation and moderation in wage growth dragged consumer confidence lower in this quarter. This could hurt employees’ disposable income and ability to spend.
These factors are also behind forecasts for spending by households to slow to around 2.5% this year from 3.5% last year.
The First National Banksponsored Bureau for Economic Research’s consumer confidence index released yesterday fell to -8 this quarter from 1 in the second quarter and -7 in the first quarter of this year.
About 2,000 adults participated in the confidence survey conducted between last month and this month.
They were asked about the expected performance of the economy, their anticipated financial position and how they rated the appropriateness of the present time to buy durable goods such as furniture, appliances and electronic equipment.
Consumers felt especially pessimistic about the outlook for the national economy, which fell to a five-year low of -14 index points during the third quarter.
This indicated that more consumers now expected the economic situation in the country to worsen over the next 12 months.
A Reserve Bank leading indicator which provides a guideline for economic growth for at least six to 12 months ahead, had dipped in and out of negative territory so far this year, pointing to sluggish economic growth in the months ahead. The indicator rose by 0.2% in July. “Strike activity, which seems to be spreading, may have exacerbated the weak confidence on the economic outlook,” said First National Bank (FNB) chief economist Sizwe Nxedlana.
This quarter has been characterised by strikes in the gold mining, vehicle manufacturing, construction and airline industries as workers under pressure from a rising cost of living and high debt levels demand above-inflation wage settlements.
Following a protracted strike by vehicle assembly line workers, the motor industry has now been struck by more strikes.
Petrol attendants and workers at components retailers, panel beaters and car and spare part dealers have now been on strike for three weeks. All of these factors are expected to cause a moderation in gross domestic product growth in this quarter.
Most forecasts are for the economy to expand 2% this year, compared with 2.5% last year.
Despite the fact that some workers have been granted aboveinflation wage increases, Mr Nxedlana said that wage growth had been moderating over the past few years.
“Even though pockets of workers are receiving above-inflation wage increases, we have been seeing a moderation in the compensation of employees over the last 12 to 18 months.”
Survey respondents’ optimism over their financial position remained low, although pessimism over financial prospects was more pronounced among lowincome groups.
“High-income households have a greater variety of income streams, for example in the form of property income,” Standard Bank economist Sibusiso Gumbi said. “This diversity would typically make them more resilient to economic headwinds than their low-income counterparts.”
The majority of high-income consumers still expected their financial position to improve over the coming year.
High unemployment levels, soaring fuel prices and lost income during strikes were identified as factors impairing the financial position of low and middle income consumers in particular.
This, Mr Nxedlana said, suggested that the deceleration in consumer spending could be more pronounced for lower-income households compared to those that were more affluent.
The majority of consumers across all income groups, population groups and provinces rated the present time as unsuitable for buying durable goods, signalling a “bleak” outlook for “big-ticket” items such as furniture and cars, according to Mr Nxedlana.
He was confident of some recovery in consumer confidence towards the end of the year, but not very optimistic about growth in real consumer spending.
FNB household and consumer sector strategist John Loos said factors such as moderate growth in real disposable income and high petrol prices were likely to keep consumer confidence under pressure over the coming months.
FINALLY, some figures that show the true nature of South African consumers. Consumers have been instrumental in driving the economy, especially after the recession about four years ago.
Spending by households accounts for more than 60% of gross domestic product. This automatically shows what is likely to happen to economic activity and growth if the buying power of this sector is suddenly reduced.
The latest First National BankBureau for Economic Research consumer confidence index shows that buying power is being eroded by a number of factors, including rising inflation, higher fuel and electricity costs, elevated levels of debt and increases in other administered prices.
It was not entirely unexpected for consumer confidence to retreat into negative territory because of these factors, but what probably caught many by surprise was the level to which the index fell, a 10year low of -8 in the third quarter.
The reasons given for the low consumer confidence levels are clear to all who follow economic developments daily.
Unemployment remains high, wage growth is moderating and so is government welfare spending. Banks are not as eager to lend as they were a couple of years ago.
It’s a theory, and one I am willing to debate, but my sense is that the consumer sector has been artificially boosted since the recession by two main factors — increased government spending, and what appeared to be unlimited lending by banks.
What is happening with consumers is more a normalisation than anything else, because the government, which increased spending to boost economic activity during the recession, is now cutting back on that spending to address its budget deficit.
Banks are also tightening their lending criteria after they started experiencing a rise in loan defaults, especially on unsecured loans.
The reduction in all these sources of funding now means the real state of consumers can be revealed. The household sector has run out of steam.
One can almost see the reasoning behind most local retailers increasing their presence in African countries, especially those with many consumers, such as Nigeria.
While the South African consumer is facing some tough times, others elsewhere in the world seem to be doing quite the opposite.
Reports out of the UK show that consumers increased borrowing while shop closures slowed. Workers also reported higher job satisfaction. The British Bankers Association reported that borrowing on credit cards and personal loans had risen for the first time in four years.
Confronted by a moderation in its economic growth rate, China is experimenting with new ways to growth — via its consumers.
With a population of 1.35-billion, China can do a lot if it successfully manages to ignite consumer spending.
That country has taken a giant step by focusing on consumptiondriven economic growth, as opposed to what it has been doing for all these years.
Most of its growth over the years has been driven by large capital investments, not only within its borders but around the globe.
Addressing a World Economic Forum gathering, the former Chinese premier, Wen Jiabao, emphasised that the Chinese stimulus plan focused on expanding domestic demand, encouraging innovation in science and technology, and increasing both rural and urban employment.
Thinking about the situation in China, SA appears to be doing the opposite. There is recognition that the country has not invested as much as it should have on infrastructure. And with consumers in the position that they are, the only other way to spur economic growth is through spending billions of rand on infrastructure. The plans are there on paper. President Jacob Zuma and Finance Minister Pravin Gordhan have told the nation about them.
Infrastructure investments, where the country hopes jobs will be created, will be driven mainly by parastatals such as Transnet and Eskom. The two have been rolling out their multibillion-rand spending on projects such as ports and power stations, although the economic circumstances are something of a drag on the effects of spending.
Despite the economy not growing as fast as it can, there is more pressure on these parastatals to fast-track the implementation of the infrastructure projects.
Whatever happens next, SA will need to move fast in order to catch up with the rest of its developing market peers.