Consumers expect more hardship

We are in trouble, and most people expect things to get worse in the foreseeable future. The latest quarterly Momentum-Unisa Consumer Financial Vulnerability Index (CFVI) confirms that South Africans were more stressed about their financial circumstances at the end of December, and of the opinion that their finances will get even worse.

The CFVI decreased from an already low reading of 49.7 points in the third quarter of 2022 to 47 points in Q4, the lowest level in 18 months.

A reading of between 40 and 50 points is seen to indicate that consumers are “very exposed” financially and that their cash flow is affected to such an extent that it creates a high risk of becoming financially vulnerable and insecure.

Of concern is that not only is the index still going down, it is getting close to tipping people into the next category – one of despair.

A reading below 40 would indicate that people’s cash flow is affected to such an extent that it creates an actual experience or sense of being financially insecure and unable to cope.

We are feeling insecure 

With the index currently at 47 points, we are a long way from feeling financially secure as measured by the Unisa and Momentum methodology.

The index needs to increase to above 60 points for people to sleep soundly at night.

The index is compiled quarterly from a survey of key informants who deal with consumers daily or study consumer finances on a continuous basis – including researchers, bankers, insurers, retailers, government, economists and analysts.

The research report notes that the term ‘consumer financial vulnerability’ implies a sense of financial insecurity or an inability to cope financially that consumers experience. In essence, the CFVI identifies the specific financial sub-components that consumers, on average, feel are causing stress to their cash flow.

Momentum says the index provides a view of consumers and the extent to which they feel vulnerable about their income, expenditure, savings and debt-servicing capabilities.

Struggling

Johann van Tonder, economist and researcher at Momentum Metropolitan Group Strategy, says the data provides important insight into the country’s overall financial health.

“With the CFVI on the decline, it is clear that SA consumers are struggling to make ends meet, and further action is needed to alleviate the situation.

“It’s no surprise that South African are struggling with financial pressures as inflation, unemployment and weakening economic growth on a local and global scale take their toll.

“The psychology of financial decline is one that we should all become more keenly aware of as we are forced to take a more cautious approach on our journeys to success,” says Van Tonder.

“When expenditure exceeds income, it creates a domino effect that negatively affects saving and debt servicing abilities – [adding] to general economic decline.”

Expectations

The researchers’ latest survey shows that the overwhelming majority of respondents expect consumers’ finances to deteriorate even more.

“The survey results indicate that South Africans remain pessimistic about the first quarter of 2023 with more than 60% of key informants expecting more financial deterioration for consumers, higher levels of unemployment and a continued rise in inflation.

“It was also found that consumers expect increased interest rates and municipal tariffs to play more dominant roles in the financial challenges ahead,” says Van Tonder.

“One thing is sure, consumers will remain financial vulnerable for the foreseeable future. SA is facing more risks to consumer finances than ever before.”

Expected risks to consumer finances

Respondents indicated a few risk factors that contribute to the sad state of affairs.

It comes as no surprise that most of those surveyed list load shedding as the biggest problem, with political instability and corruption second. Rising food prices are also high on the list of concerns.

More than 95% of respondents say load shedding is a huge risk to consumers’ financial wellbeing. That was their view in December, and power interruptions have become much worse since then.

Just as many people note that corruption is one of the biggest problems.

Politics, corruption, vicious circle

“The negative financial effects of load shedding on consumer finances are well known,” the research team writes in their report.

“Lesser known is how political instability and corruption affect consumer financial vulnerability.

“Weak service delivery in the form of sub-optimal education and health services, as well as inadequate maintenance of infrastructure and inefficient municipal services, are outcomes of political instability and corruption.

“It directly increases the costs of services, which in turn contributes to higher inflation and therefore reduces consumers’ ability to afford their normal purchases,” the researchers add.

“Higher inflation keeps interest rates at higher levels than what it could have been, which means consumers pay more interest on debt, negatively impacting their disposable income.

“Less income, and therefore less saving and spending contributes to less employment and lower economic growth.

“In addition, as corruption benefits a few at the expense of much of the population, it increases income inequality and poverty.”

The team notes that political instability and corruption became more pronounced as 2022 progressed, and by the fourth quarter had overtaken other high-risk factors such as rising food and fuel prices and increasing interest rates.

Food prices

Back in December people also felt that food prices would continue to increase during at least the first few months of 2023.

This fear has already come true. Inflation figures for January 2023 show that food and non-alcoholic beverages increased by an annual rate of 13.4% in January, the highest reading since April 2009 when the rate was 13.6%.

“Of all the product groups in the consumer price index basket, bread and cereals recorded the highest rate in January (21.8%). This was up from 20.6% in December and is the highest reading for this category since February 2009 (23,8%),” Stats SA noted in its report.

Worries about higher interest rates, unemployment, increases in municipal rates and the petrol price were on par with concerns about being able to afford food.

Impact on spending, relationships and productivity 

Momentum says the experience of a deterioration in (already low) levels of happiness and hope affected people’s financial conduct.

“Consumer key informants noted more impulsive and ‘feel-good’ purchases,” it says.

“Known as ‘therapeutic buying’ in psychological terms, it makes a person in dire circumstances feel good about him or herself or their financial means when purchasing something. However, this may eventually catch up with consumers, especially if the purchases are unaffordable and may as such contribute to higher financial vulnerability later on,” it adds.

Consumer key informants also noted a continuation of previous trends, such as the strain financial vulnerability puts on relationships with family and friends. It also negatively affects productivity at work.