Despite a recovery, consumer confidence remains low

While the rebound in the CCI is heartening, the latest index number remains well below the long-term average reading of +5 for the CCI. In fact, the CCI is currently roughly on par with the lowest reading recorded during the 2008/09 recession (-6).

During 3Q2015, the financial position sub-index of the CCI rebounded by 13 index points to +11, more than reversing the 9-point drop of the previous quarter. The economic outlook and time to buy durable goods sub-indices improved by 9 and 10 index points respectively, but remain below their 1Q2015 levels.

Not a good time to buy durable goods

In fact, with the economic outlook index currently at -15 and the time to buy durable goods index at -9, most 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.

Sizwe Nxedlana

According to Sizwe Nxedlana, chief economist of FNB, "A confluence of adverse developments already started to weigh on the outlook for the domestic economy in 1Q2015, including increasingly frequent power outages, the severe drought affecting harvests in the Free State, North West and KwaZulu-Natal provinces, a further depreciation in the rand exchange rate and the tightening in fiscal policy announced in the February 2015 National Budget. The subsequent explosion of xenophobic violence in Durban and Johannesburg in April and petrol price hikes of more than R2 per litre perhaps served as the final nail in the coffin for consumers in 2Q2015, with the CCI plummeting to a 14.5-year low. Conversely, the rebound in consumer sentiment in 3Q2015 can probably be ascribed to, among other things, the roughly R1,20 per litre drop in petrol and paraffin prices since July and the recent respite in load-shedding."

High income consumers are fairly optimistic

Consumer confidence levels recovered some lost ground across all population and household income groups in 3Q 2015. The confidence levels of high[1] and higher-middle[2] income consumers saw the largest rebound (to +1 and +2 index points respectively) and is currently higher than the 1Q2015 readings (but still below their 2H2014 levels). Nxedlana noted that, "Somewhat surprisingly, high-income consumers are once again fairly optimistic about the outlook for their household finances. Although successive petrol price cuts would indeed have brought some relief to the higher income groups, one may have expected the increase in personal income tax rates, the recent hike in the prime interest rate and the slump in stock prices on the JSE to temper high income sentiment regarding their household finances."

Other possible factors that could have weighed on the confidence of the higher-middle income group include poorer employment and wage hike prospects in the public service and tighter credit conditions. Many newly emerged households also currently carry a high debt burden due to overspending in the past, leaving them with little scope for discretionary spending and unforeseen expenses.

After nose-diving from -3 to a decade low of -20 index points, the confidence levels of low[3] income consumers edged up to -13 index points during 3Q2015. Consumer sentiment among lower-middle[4] income consumers also improved from an all-time low of -17 index points to -6 in 3Q2015. However, like the low income group, the confidence levels of lower-middle income households remain more depressed compared to their 1Q2015 and 2H2014 readings.

Nxedlana pointed out that, while the sharp drop in paraffin prices in August and September would have given a slight boost to the disposable income of the lower income groups, public transport fares did not decrease to the same extent as the drop in fuel prices. Low income households who make use of bus, train and taxi services therefore did not receive the same relief in terms of their transport costs compared to the higher income groups (who predominantly rely on private transport, and hence benefit more directly from lower fuel prices).

"Tighter credit conditions, sustained high levels of unemployment and the recent drop in employment in the drought-stricken agriculture sector - not to mention reports that further large-scale job losses could be on the cards in South Africa's ailing mining sector - are in all likelihood weighing down consumer sentiment among lower-income consumers in particular," said Nxedlana. Job losses in the mining sector usually also adversely affect low income earners in rural areas, as they often depend on transfers from a breadwinner or family member that derived an income far away from home in the mining sector.

The strong rebound in the CCI during 3Q2015 suggests that the second quarter collapse in the index (to its lowest level since 4Q2000) might have been an overreaction, or at least in response to (temporary) adverse developments that have since been resolved or improved (e.g. xenophobic violence, soaring fuel prices and frequent load-shedding). Nevertheless, at -5 index points, consumer confidence remains depressed, pointing to a low willingness to spend and utilise credit among households. Under these conditions, consumers tend to postpone their durable goods purchases and cut their spending on discretionary items.

Consumers' ability to spend under pressure

Consumers' ability to spend, as measured by their real disposable income, is also forecast to come under increased pressure towards the end of the year as the disinflationary impact of the lower rand oil price fades, food inflation accelerates and the full impact of higher personal income taxes manifests. Additionally, the outlook for both job creation and credit growth in South Africa remains poor, while the SARB is expected to hike interest rates again over the next six months. "Given that the growth in government employment and social grants expenditure is also set to moderate, real consumer spending may well slow further from its current pedestrian pace of 1.5% year on year over the next 6-12 months," said Nxedlana.