FNB/BER index shows recovery in consumer confidence

A reading of -1 indicates that consumers are neither optimistic nor pessimistic or that the optimists balance out the pessimists.

Don't get excited

One should not get too excited by this recovery. At -1 consumer confidence is at its lowest level since the beginning of 2004 (when -7 was registered during 04Q1).

According to Cees Bruggemans, chief economist of FNB, the prolonged high consumer confidence levels of the past three years (2005-2007) appear to be something of the past, at least for the time being. “The 08Q3 rebound may be short-lived if it is a correction after the first half of the year overreaction. The 08Q3 results, therefore, most likely do not usher in a return to the high levels of the past”, said Bruggemans.

However, the 08Q3 results indicate that one should not yet write off the consumer. At -1 consumer confidence is still relatively high despite the cumulative 5 percentage point interest rate increase since 2006, tightening credit standards, falling house prices, eroding real income (due to surging petrol and food prices) and increasing uncertainty about employment, South African politics and the international economy. A level of -1 is close to the FNB/BER CCI's long-term (1982Q2 -2008Q3) average of +2.

Basis of CCI

The FNB/BER CCI is based on three questions, namely the expected performance of the economy, the expected financial situation of households and the rating of the appropriateness of the present time to buy durable goods (such as furniture, appliances, electronic equipment, vehicles and jewellery).

The 08Q3 rise in confidence can be attributed to a reversal in consumers' views on the economy and their own finances. However, they have further downgraded the present as an appropriate time to buy durable goods.

• Previously, a net majority of 14% of consumers expected the economic performance to deteriorate during the next 12 months. During 08Q3, the percentage of consumers expecting an improvement exceeded the percentage expecting a deterioration by 2%.
  
• The net percentage expecting their household finances to improve during the next 12 months increased from 5% during 08Q2 to 13% during 08Q3.
  
• However, the net percentage rating the present as an inappropriate time to buy durable goods increased from 9% to 17%, the highest number since 04Q1.

The confidence of high income consumers¹ increased from -5 to +4 and that of low income consumers² from -7 to -5.

• Regarding the performance of the economy, presently all income groups expect an improvement, whereas all expected deterioration previously. In the case of the high income group, the economic performance sub-index increased by 21 index points, from -17 during 08Q2 to +4 during 08Q1. A smaller increase of 12 index points (from -12 during 08Q2 to zero during 08Q3) occurred in the case of the low income group. Currently high and low income groups' views on the prospects for the economy do not differ by much.
  
• However, there is a big difference between the high and low income group's views on personal finances. Whereas 22% net of high income households (up from 14%) expect an improvement over the next 12 months, only 5% (up from -2%) of low income households expect the same. Bruggemans said: “The fact that the SARB did not increase the interest rate in August and the petrol price is on its way down buoyed the confidence of the high income group”. In contrast, the financial situation of the low income group remained difficult. The high food price increases have a much bigger impact on their finances than on those of the high income group, as food makes up a far larger share of their total expenditure. Furthermore, the low income group has so far not benefited from the lower petrol price, as most people falling in this group do not own vehicles and taxi, bus and train fares have not declined yet.
  
• The net percentage of consumers rating the present an inappropriate time to buy durable goods increased by much more in the case of the low income group than in the case of the high income group. The time to buy durable goods sub-index of the low income group declined by 14 index points (from -7 during 08Q2 to -21 during 08Q3), whilst that of the high income group retreated by only 5 index points (from -11 to -15). Both income groups face higher debt service costs and access to new credit has become much tighter, if not impossible.

Over the past few years, the easy availability of credit at banks, as well as furniture and clothing stores enabled the bottom end of the high income group and the top end of the low income group to acquire goods at a much faster pace than afforded by their income growth. The substantial tightening of credit standards following the rise in defaults and the introduction of the new national credit act (NCA) during mid-2007, as well as the substantial increase in debt service costs, have hit this so-called emerging middle income group hard. This group has to make huge, unpopular adjustments to their lifestyle, as they now not only have to service existing debt, but they also no longer have easy access to further new credit. No wonder that the time to buy durable goods sub-index of the lower middle income group (earning between R800 and R4,000 per month) registered the largest fall of all groups, namely 18 index points (from -3 during 08Q2 to ­21 during 08Q3).

No sign of consumer spending slowdown

In conclusion: “In my view, the 08Q3 rebound in the FNB/BER CCI does not signal the end of the slowdown in consumer spending. I interpret the recovery as an interim revival, a typical occurrence during the downturn phase of consumer confidence,” said Bruggemans.

The 08Q3 survey indicates that consumers turned more optimistic about the economy and their own finances over the next 12 months, but that they regard the present as an even more inappropriate time to buy durable goods.

Resumption of downward trend

Consumer confidence will most likely resume its downward trend should consumers' optimistic expectations about the economy and their own finances fail to materialise. (The economic and household finances sub-indices will decline.) Such a development is most likely, given that the higher interest rate, tighter credit conditions, falling house prices and deteriorating international economy will dampen economic growth in South Africa with a lag in time. Consumers will consequently face increased uncertainty about employment and lower real income growth (as the tighter financial position of employers prevents them from fully compensating their employees for higher past inflation) during upcoming quarters, which will disappoint them and dent their confidence once more.

Research

The fieldwork for the 08Q3 survey took place between 20 August and 4 September 2008 and the results were processed on 25 September 2008. Since the previous survey (conducted during May / June), the price of unleaded petrol at the coast increased from R9.22 per litre to R10.40 in July, before declining to R10.10 in August and R9.42 in September. The fieldwork was completed before a political settlement was reached in Zimbabwe, ANC president Jacob Zuma won his court case against the national prosecuting authority (NPA), Thabo Mbeki resigned as president of South Africa and the biggest financial crisis in the USA since the Great Depression deepened.

For more information, visit: www.fnb.co.za/economics

1. Defined as households with a monthly income in excess of R5 000.
2. Defined as households with a monthly income of less than R5 000.