Consumer confidence drops, spending could moderate

The third quarter fall can mostly be attributed to a large decline in the percentage of consumers expecting an improvement in the economy. The percentage expecting an improvement in their own finances also declined, but to a lesser extent, while the percentage rating the present as an unsuitable time to buy durable goods remained almost unchanged relative to 2Q 2011.

The sharp fall in foreign and local share markets as well as news reports of much weaker economic growth in South Africa in the second quarter, probably led many consumers to revise their outlook for the South African economy downwards.

Three aspects of economy

The index combines the results of three questions posed to adults in South Africa between 15 and 23 August 2011.

• Expected performance of the economy dropped 15 index points, from +17 to +2. This is the biggest decline in the index since the middle of the global financial crises in 2Q 2008.
  
• Expected financial position of households declined from +22 to +15. Many consumers that scaled down their expectations regarding the performance of the economy did not do so with respect to their own financial outlook.
  
• Rating of the appropriateness of the present time to buy durable goods increased from -5 to -4). The reasons why this index remained virtually unchanged could be consumers' expectation that their own finances are shielded from these adverse economic developments and news reports that the interest rate is unlikely to increase in the near term future. There is even a chance that the interest rate could decline.

Income earnings show divergence

The confidence of high income earners (i.e. those earning in excess of R5 000 per month) fell by 5 index points (from +13 to +8) and that of low income earners by 8 points (from +9 to -1).

However, these two broad groups mask some divergent underlying developments. The confidence of all sub-groups except for the higher middle income group (i.e. those earning between R5 000 and R10 000 per month) declined during 3Q 2011.

The higher middle income group scaled down their outlook for the South African economy only marginally, which left their optimistic expectations for their own finances unchanged and switched their rating of the suitability of the present time to buy durable goods from wrong to right.

Previously, a net 7% of higher middle income earners rated the present as the wrong time to buy durable goods. Currently, a net 4% rate it as the right time. The contrary view of this group could be attributed partly to the fact that civil servants (whose continued employment is secure) and workers, who got higher wage increases through recent strike action, which make up a large part of this group.

Confidence keeps retreating

Commenting on these results, Cees Bruggemans, chief economist for FNB, said that consumer confidence keeps retreating and that in retrospect, 3Q 2010 was probably the high tide in consumer confidence of the post-recession period. Ever since, there has been an orderly retreat, with consumer confidence giving ground rather reluctantly.

The great surprise of recent years had been the only limited pullback in consumer confidence from record boom levels in 2006-2007 to basic neutrality in the recession of 2008/2009 before quickly resuming high levels of confidence by late 2009 and through most of 2010. It was as if the recession was only a minor interruption in a very long consumer boom, which, after the merest hesitancy, resumed.

Safety net created illusion

This probably was the experience of some consumers, especially those in protected employment enjoying high salary increases (public service), those benefitting from successful union demands, those with scarce talents and high professional qualifications enjoying scarcity premiums and even the many poor progressively drawn into the government's social safety net as millions more received grants and allowances.

In contrast, many working in badly hit sectors, such as building trades, construction, property and manufacturing or for small and increasingly struggling businesses were not so favoured.

It was far worse for those who lost their livelihood in the recession (some 1-in-14) or the over-indebted, hurt by the sharp increase in interest rates and subsequent debt workouts. The many unemployed, underemployed and discouraged likely remained deeply demoralised.

Did events therefore warrant such large majorities of consumers to express confidence in their own financial prospects for so long and by extension for a while in the economy's prospects? During 2H 2009 and most of 2010, they certainly were right to do so as their real incomes improved much more strongly than expected and the economic recovery was mainly carried on the back of a broad consumer revival. However, from late 2010 onwards things started to change and in recent months progressively so.

Real income gains lessened

The most fundamental reality was probably that nominal wage and salary increases no longer kept rising as fast as they had done in 2009/2010 (this despite very visible union demands and strike action).

Simultaneously, inflation troughed and started a long ascent, CPI inflation today at 5.3% already 2% higher than it was a year ago. Higher electricity, oil and food prices were mainly to blame.

Real income gains have recently been far less robust than they were a year ago, many of the political issues and social strains (labour strife) may have made some (though not all) consumers more cautious and the unfolding drama of overseas debt crises in the EU and US and domestic talk of higher interest rates (particularly distressing to the still highly indebted) have created a varied mosaic of consumer tendencies unfolding over the past year.

Three sharp indicators

Three details stand out about the past 12 months.

• White consumers adjusted their confidence down most, from +10 to -10, nearly three times more than Black consumers who gave way only to a limited degree (though still noticeably, from +20 to +12).
  
• Three out of four income groups adjusted expectations downward, the highest incomes from +21 to +5 and the lowest incomes from +5 to -2. The exception has been the so-called "high-middle" (R5000 to R10 000 monthly income) where confidence proved surprisingly durable (and even increased in 3Q 2011).
  
• Distinct difference between English- and Afrikaans-speaking consumers on the one hand and Nguni- and Sotho-speaking consumers on the other hand regarding "now being a good time to buy durable goods". Throughout the past 12 months, the former has maintained very large negative majorities of -20 to -29 as compared to substantial positive majorities of +2 to +10 for the latter.

White consumers may have been politically more worried about domestic events and, given high indebtedness, economically more worried about possible higher interest rates and fallout from global crises.

In contrast, Black consumers may have felt less political anxiety and many may have enjoyed a considerable sense of economic well-being, given the trend in their real incomes and the opportunities available to some of them.

Downswing factors not present

The past 30 years offer four major cyclical downswing comparisons (and the message that once lost a cyclical peak is not re-attained until the next business cycle). Two of these downswings were sharp and massive, induced by major 'shock' events (1985, 2008).

The other two were more gradual affairs (1989-1994 and 1995-1999). In both instances, the economy was not able to sustain upswings, overheating quickly and inviting policy tightening (higher interest rates keeping upswings short) and attended by major political uncertainty.

Today's consumer confidence downswing and what probably still waits does not match most of these features.

There has been no massive shock event. There has also been no economic overheating and the start of policy tightening (interest rates remaining at 30-year lows). However, inflation has risen off its cyclical low, inviting talk of higher interest rates during 1H 2011.

Also, the economy has been supply-side constrained, reminiscent of the 1980s and 1990s in the way GDP growth, job gains and income potential has been limited. Political events have certainly induced anxiety in some consumers, probably further reinforced by menacing overseas financial events.

In key consumer groupings, this may have led to a waning of confidence. Most importantly, higher inflation and slightly less robust nominal income gains may have led to a fading of real income gains.

With business having kept back from new labour hiring and fixed investment revival, these volatile business cycle components remain suppressed, removing an important downside risk to the economy. The same applies to household demand for residential property.

With policy supportive (and possibly still becoming more supportive shortly) and the cyclically most volatile components of spending still fully suppressed, a descent into full blown recession is most unlikely provided there are no major shock events like 1976 (Soweto), 1985 (Rubicon), 1998 (Asian Contagion) or 2008 (Anglo-Saxon Crash), causing a generalized spending pullback by many.

Supply side constraints hold back expansion

We seem to be experiencing a cyclical expansion that is severely supply-side constrained, accompanied by important political stresses restraining 'animal spirits' and a real income engine turning mildly anaemic.

It makes for growth underperformance and less ebullience and thus we expect to finally leave prosperity-era consumer confidence levels behind (even if it still survives in protected pockets here and there) and settle down to a less robust consumer environment, even if short of descending into recession.

Coming quarters will probably show relatively subdued consumer confidence levels midway robust expansions and recessionary conditions.

Some sentiment revival may be possible if there were to be renewed policy support (interest rate cuts), but one needs to remain realistic about supply constraints, political events and global crises of inducing anxiety in some consumers.