Consumer confidence gives the ghost

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By Cees Bruggemans

What took four years to build up during 2004-2007 was wiped out in a matter of six months in 1H2008. It is a dubious achievement indeed.

FNB/BER consumer confidence dropped to a level of -6 in 2Q2008 compared to +12 in 1Q2008 and +22 in 4Q2007. That’s a cumulative drop of 28 points.

This takes us from a near-record majority of urban South African consumers from all walks of life expressing confidence as recently as November 2007 to a majority of consumers expressing lack of confidence in June 2008.

This cumulative decline is one of the biggest on record and calls to mind 1998 and 1985, when the prime interest rate hit 25%.

In March 2008 we could still report that urban South African consumers’ confidende in the economy had declined substantially, though their view about their own financial prospects in the coming year remained largely unimpaired.

Whatever was happening or was going to happen was apparently going to happen to other South Africans.

By early June 2008 this still comfortable view had been severely revised. Not only did confidence about the economy drop DOUBLE the distance it had in March, to a reading of -14, but own finances were similarly marked down and remained barely positive at +5.

Apparently what was happening to the economy was now increasingly felt and expected by many consumers themselves as well.

The rate of the decline and the level of confidence attained showed the same pattern in nearly every social dimension, be it race, language or income.

This time it serves little purpose to show much survey detail, for the movements in nearly every case are overwhelmingly large and down, and even more so when taken over two quarters.

Most interestingly, black and white consumers are steadily coming together again as their differences in outlook narrow in these challenging times.

During 4Q2007 black confidence still led white confidence by +24 points. By 1Q2008 this gap had narrowed to +17 points. In 2Q2008 it has narrowed further to +11, with both sets of consumers now in negative territory.

There is a message here. The economic outlook for the next 12 months has certainly deteriorated dramatically, with Eskom, CPIX inflation, oil, food and house prices and interest rates clearly the big drivers, though for some consumers issues such as Zimbabwe and xenophobia will also have been factors.

As to the outlook for the next 12 months to mid-2009, there is downward momentum in the consumer confidence indices, which probably have still more bad news to absorb, such as a 13% CPIX peak, yet higher petrol prices and possibly still higher interest rates if the SARB’s Monetary Policy Committee hasn’tt quite finished with us.

The outlook is therefore bleak, with even lower consumer confidence readings expected over the next 12 months.

This is bound to leave its mark on household consumption spending. Its growth can be expected to slow down further, with important parts especially in the durable sector already experiencing deep recession, and others such as certain kinds of semi-durables possibly on their way there by late 2008 or early 2009.

Though there are bright spots in the economy, such as agriculture, non-gold mining, infrastructure construction and the public sector (the latter pretty much recession-proof), large sections of the remainder of the economy are fully exposed to the sharp deterioration currently being experienced.

Given the traditional predictive capability of the consumer confidence index at turning points in the business cycle, the continued rapid loss of confidence from record high levels in 2007 is making recession in the broader economy ever more likely, possibly starting in either 4Q2008 or 1Q2009.

This would be relatively late, given the abrupt loss of confidence observable in 1H2008. But then the economy entered 2008 with a growth momentum of over 5% and very strong windfall sectors, even if small in size, which features may postpone the actual arrival of recession, though not indefinitely if the momentum loss were to continue as currently expected.

Only a sudden change for the better, in oil, food, CPIX and interest rates, might prevent such an outcome. The omens, however, are hardly favourable. This is seemingly sensed by many consumers and registered in these plunging consumer sentiments.

Source: Cees Bruggemans, FNB, July 2, 2008.


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