Warning for middle-class South Africa

Financial services firm Deloitte says South African consumers remain under severe financial strain – while businesses are being exposed to much higher costs.

The group’s latest Consumer Tracker for April showed that 41% of consumers feel that their financial position has worsened over the past year and are worried about their financial circumstances.

“Given the rising cost of food, based on the data, consumers are not only making greater trade-offs – such as purchasing lower-cost meat, buying more store brands and less costly ingredients – but are also being more frugal, mostly saving by reducing food waste, buying only essentials, and buying less than they want.”

Due to stubbornly high food inflation and higher fuel prices, inflation rates in South Africa have exceeded the South African Reserve Bank’s (SARB) target band of 3%-6%.

In February 2023, headline inflation rose slightly from 6.9% in January to 7%. Counter to market expectations, inflation rose again in March to 7.1%.

Rising inflation is primarily due to high food prices, which increased 14% year on year in March, reflecting the ongoing pressure exerted by load shedding, said Deloitte.

FNB’s consumer confidence index (CCI) tumbled to –23 points in the first quarter of 2023 (from –8 in Q4 2022) – the third lowest CCI on record since 1994, with likely repercussions, for example, on lower durable goods items sales this year, said the company.

As load shedding shows no sign of slowing over the second half of 2023, consumers are likely to face more price hikes, said Deloitte.

It added that retailers and consumer goods companies would spend more on power backups and, in turn, increase the cost of doing business which ultimately is passed onto input costs.

“Similarly, many higher-income households have already started investing in backup and renewable power solutions, or they are likely considering these options given the recently announced tax rebate for the fiscal year 2024, which requires making certain purchasing trade-offs,” said Deloitte.

Markets and economists expect another 25 basis point hike this year by the ‘relentless’ Reserve Bank, which recently concluded its ninth consecutive interest-rate hike – up 50 basis points – at the end of March.

The SARB has deemed the risks to inflation to be on the upside, with food price inflation as well as core goods inflation expected to be higher than previously anticipated this year.

Of concern has also been the heightened risk profile of economies, such as South Africa, that need foreign capital to finance the increasing current account deficit, given tighter lending conditions globally, Deloitte said.

“This will place greater pressure on middle-class consumers and soften consumer demand, with tighter lending conditions dampening investment decisions and hiring for firms, and ultimately the growth outlook.”

“Together with business-continuity issues – load shedding, most prominently – this is likely to impact margins and profitability of the private sector in the coming months, which could see spillovers to the fiscus, for example, through lower corporate income taxes,” said the financial services firm.

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