Johannesburg - After declining from +22 to +12 during the first quarter of 2008, the FNB/BER consumer confidence index (CCI) plummeted by a further 18 index points to -6 in the second quarter.
According to Cees Bruggemans, chief economist of First National Bank, and Stellenbosch University's Bureau for Economic Research (BER), who compile the index, this constitutes the largest fall between consecutive quarters in 24 years.
At that time (1984Q2) the CCI fell by 27 index points. The latest fall also exceeds the 16 index points registered eight years ago (2000Q2).
Although the second quarter produced the biggest drop in consumer
confidence between consecutive quarters in close to a quarter of a century and the overall mood of consumers switched from positive to negative, the current level of -6 is not low by historical comparison. A similar level prevailed a meagre four years ago (2004Q1).
The drop in consumer confidence can be attributed to, among other
factors:
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an accelerated increase in food prices and transport costs,
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the April increase in the prime overdraft rate (the fieldwork of the second quarter survey was completed before the announcement of the June increase) and media reports quoting the Reserve Bank and market analysts as saying that further increases were likely,
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deteriorating employment prospects,
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falling house prices,
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an eruption of violence against foreigners from the rest of Africa and
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media reports of a worsening situation in Zimbabwe.
"Whereas previously a net majority of 13% expected the economy to
improve, now a net majority of 14% expects the economy to deteriorate.
"The net majority expecting an improvement in their own finances over the next 12 months declined sharply from +23 during 2008Q1 to +5 during 2008Q2," the authors point out.
Previously respondents were equally split between those favouring the present time to buy durable goods and those against doing so.
The balance shifted further during 2008Q2. Now a net majority of 9% rated the present as an inappropriate time to buy durable goods, they add.
"An analysis of the constituent parts of the FNB/BER CCI, therefore, indicates that significantly more consumers became negative about the economy, their own finances and the timing to buy durable goods since the previous survey, said Bruggemans.
Of all the constituent parts, the one on the expected economic
performance registered the biggest fall. The economic performance sub-index plunged 27 index points compared to 18 and 10 respectively in the case of the household finances and time to buy durable goods sub-indices.
"It is evident that consumers have turned negative on the economy and time to buy durable goods, but they are still positive - albeit to a much lesser degree than previously - about their own finances," Bruggemans said.
Some other interesting findings include the following:
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White consumer confidence declined by 14 index points - from -1 during 2008Q1 to -13 during 2008Q2. Black consumer confidence declined by 20 index points - from +18 during 2008Q1 to -2 during 2008Q2.
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White consumers are more negative about the economy and time to buy durable goods than black consumers. Previously more black consumers (on a net basis) than white consumers expected their own financial position to continue improving over the next twelve months. However, the number of black respondents holding
this position declined so sharply during 2008Q2 that black consumers caught up with their white counterparts in being a lot less confident about further improvements in their household finances.
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Previously the confidence of high income earners was higher than
that of low income earners. The gap nearly disappeared after high
income earner confidence fell by more than that of low income
earners during 2008Q2. While high and low income earners became
more or less equally pessimistic about the economy, high income
earners remained more optimistic about improvements in their
financial position than low income earners.
The sharp decline in consumer confidence foreshadows more subdued household consumer and investment spending during upcoming quarters.
"When consumer confidence drops to below zero, households typically cut back spending to below real personal disposable income in order to reduce outstanding debt", said Bruggemans.
Households without debt normally increase savings under such circumstance.
Given the expected lower growth in real disposable income (due to, among other things, higher than expected inflation and weaker employment growth), this implies even lower growth in household spending compared to a situation where only consumer confidence fell.
Items that have previously been boosted by credit - such as sales of durable and semi-durable goods - will be more adversely affected, according to Bruggemans.
- I-Net Bridge