Johannesburg - As consumer confidence takes a dip, consumers curb their spending on discretionary goods and credit exposure.
The Bureau of Economic Research’s (BER) Consumer Confidence Index (CCI) fell two points from -9 index points in the first quarter of 2016 to -11 index points in the second quarter of the year. The weaker reading is attributed to political uncertainty, a limited expansion in public sector employment, social unrest, rising food prices and previous hikes in the domestic interest rate.
As a result, discretionary spending has been reduced, explained economist Sanisha Packirisamy of Momentum Investments. Non essentials such as new vehicle sales have been reduced and replacement purchases for furniture for example have been delayed for a point where consumers are more confident in their financial position, she told Fin24. “Spending is allocated to necessity goods.”
Credit demand and supply has also been impacted. Low income earner indebtedness is far worse since the global financial crisis in 2008. As a result, their demand for credit has come down. Banks are also worried about a downturn in the economy, and have curbed their credit exposure to low income earners who may not be able to pay back debt, said Packirisamy.
Conversely, higher income earners have lower debt levels since 2008, and banks are more willing to lend to them because of their likelihood to pay back debt.
The drop in consumer confidence
For low income earners there is a good correlation with consumer confidence levels and employment, explained Packirisamy. “For low income earners, employment growth has tanked. With no prospects of a job, confidence levels have dropped,” she said.
For higher income earners, confidence levels are still negative, but they are sheltered by the positive effect of their savings and the wealth effect from property and equity markets. With S&P’s and Fitch decision not to downgrade the credit rating below sub-investment grade, equity process picked up which benefitted high income earners with equity portfolios, explained Packirisamy.
“The rising inflation means that their wages took a knock but they are sheltered because of the additional sources of income.”
Overall both low income earners and high income earners have a negative economic outlook. When it comes to confidence in personal finance, the wealth effect pushes up expectations for high income earners. Low income earners however are not positive about job prospects and feel negative about their financial situation, she said.
Trickledown effect on the economy
Consumers make up 65% of GDP growth. “When consumers under pressure, economic growth is under pressure,” she said.
Other contributors to GDP such as fixed investment is not doing well either. Companies are limiting investment in capital. The government’s fiscus is also under pressure, and the government is hiring at a slower pace than it did in the past, she explained.