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Cape Town - There is a sense among South African consumers that the country's so-called perfect storm has started, according to the latest Momentum Consumer Financial Vulnerability Index (CFVI).
A perfect storm is a rare combination of events or circumstances that create an unusually bad situation, the report explains.
The index report explains that during the second quarter of 2017 SA consumers witnessed a mix of negative economic and political events, including new allegations of state capture and corruption. The CFVI declined sharply in the second quarter, from 52.3 points in the first quarter of 2017 to 48.4 points in the second quarter of 2017.
Consumer and business confidence were low during this quarter, mainly due to increases in personal income tax rates that became effective and had a negative impact on consumers’ disposable income. These increases may have offset any modest, real increase in salaries and wages, the report points out.
A high unemployment rate also fuelled higher levels of uncertainty regarding job and income security, and dampened the outlook for new employment opportunities. At the same time a decline in credit extension by banks and retailers led to households having to adjust their purchasing and spending habits.
All of these factors translated into a sense that the "perfect storm" has started, as seen from the index results.
"The outlook for a recovery is not promising. During the previous economic recession in 2009, the government was able to stimulate the economy
by easing fiscal policy, while the SA Reserve Bank (SARB) had greater scope to cut interest rates," the CFVI report cautions.
"These remedies are not available to the authorities in the current situation, or at least not to the extent required to lift the economy out of its current predicament."
Sensitive to change
The latest index results indicate that consumer finances are now very sensitive to changes and that even a slight mishap will have a severe impact on the average consumer’s cash flow situation.
Consumers perceived their finances to be very exposed to influential events during this quarter, compared to feeling only mildly exposed in the first quarter of 2017.
Moreover, this is the first time since the inception of the index in 2013 that consumers indicated they feel very exposed in all four sub-components of the index, namely income vulnerability, expenditure vulnerability, savings vulnerability and debt servicing vulnerability.
This means compared to the first quarter of 2017, consumers in general experience uncertainty regarding their income and believe that they cannot purchase what they used to buy. They are struggling to pay accounts or debts and are unable to save sufficiently for retirement and other goals.
Very dangerous situation
"Being very exposed in all four sub-components is a very dangerous situation, because it means that consumers don’t have a 'fall-back' option, as
is the case with being mildly exposed," states the report.
When consumers indicated in the past that they felt only mildly exposed in a category, that meant they felt like they will be able to juggle between saving, debt and expenditure to make things work.
The new sentiment of them feeling very exposed in each category, means they will have to consider giving up doing well in more than one sub-category in order to do better in another.
Due to feeling exposed in terms of their income, expenditure, savings and debt servicing, consumers are, therefore, very uncertain as to whether they will be able to comply with all their commitments.
This creates what the report calls a very dangerous situation, as it means consumers have to consider giving up doing well in more than one sub-component (for example savings and debt servicing) in order to do better in another (for instance expenditure).
"Under these conditions, consumers need to be very careful when making financial decisions," the report concludes.
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