Consumer confidence increased during 1Q2009

The FNB/BER consumer confidence index (CCI) increased by 5 index points, from –4 during the 4Q2008 to +1 during the 1Q2009[1]. A reading of +1 indicates that there are currently slightly more optimists than pessimists.

The 1Q2009 increase follows on the sharp fall of 2008, when the FNB/BER CCI plummeted from +22 during 4Q2007 to –4 during 4Q2008. “The FNB/BER CCI has only fallen by such a large magnitude in such a short time span once before, namely during the period 1984 – 85”, said Cees Bruggemans, chief economist of First National Bank

The global economy has deteriorated further since the previous survey was conducted during November 2008. Economic growth contracted sharply in many countries, millions of people were laid off, some countries experienced bank crises and share prices tumbled further. Consumers in many parts of the world are gripped by fear. The global economy is heading for its biggest contraction since the Second World War. Consumer confidence has dropped to near record lows in the USA and parts of Europe. In light of these developments, the increase in the FNB/BER CCI bucks the overseas trend.

A number of developments supported consumer confidence in South Africa during the survey period and partly explain the increase in consumer confidence. The positive developments include the following:

· the 150 basis point interest rate cut since December and prospects for further declines (the survey was conducted before a further 100 basis point cut was announced on 24 March 2009),

· a R2.35 drop in the petrol price between November and February,

· the decline in inflation,

· a relatively stable rand exchange rate and

· a confidence boosting and stimulatory national budget announced on 11 February 2009.

The budget was positive for households. Households will benefit indirectly, as the fiscal stimulus partly counters the slump in economic activity. The budget also included a number of measures to increase the disposable income of households directly, such as the additional R13bn set aside for social grants and the R4.1bn for the expanded public works programme. Furthermore, the personal income tax scales were adjusted to fully compensate for inflation. However, the increase in the fuel levy will partly offset the benefit of the tax rate adjustment.

The FNB/BER CCI is based on three questions, namely the expected performance of the economy, the expected financial situation of households and the rating of the appropriateness of the present time to buy durable goods (such as furniture, appliances, electronic equipment, and motor vehicles).

During 1Q2009, the net percentage of consumers rating the present as an inappropriate time to buy durable goods remained more or less unchanged relative to 4Q2008 (the index changed from –16 to –15). However, the net percentage expecting their own finances and the economy to improve during the next 12 months increased. The own finances sub-index increased from +9 to +15 and the economic performance sub-index from –5 to +4.

Bruggemans said: “The reason why the own finances sub-index increased during 1Q2009 is probably because the positive impact of the interest rate cuts, lower petrol price and national budget fully countered the adverse impact of the job losses and fall in house prices”.

Possible reasons why consumers continued to rate the present as an inappropriate time to buy durable goods are their high debt burdens, increased difficulty in obtaining credit, a stock effect and the decline in residential building activity.

In conclusion: According to the Quarterly Bulletin of the SA Reserve Bank, the growth[2] in real consumer spending slowed down from 9.3% during 3Q2006 to –2.7% during 4Q2008. The 1Q2009 FNB/BER CCI result of +1 has historically been associated with pedestrian growth in consumer spending. The low level of the time to buy durable goods sub-index indicates dismal growth in spending on durable goods. Credit spending would also remain weak.

With the time to buy durable goods sub-index low and the economic performance and own finances sub-indices high, any rise in real disposable income should lead to increased consumer spending on non-durable goods and services. Such a rise in real disposable income could happen if the positive impact of the lower interest rate and inflation continues to outweigh the negative effect of job losses