Consumer confidence index not as bad as the '80s, but it's not far off

Following an improvement in consumer confidence in the third quarter, the FNB/BER consumer confidence index slipped to negative 10 in the final quarter of last year.

The third-quarter surge had been largely attributed to growing optimism about the future of the economy in the wake of the local government elections in which the ANC surrendered three major metropolitan councils.

But results from the fourth quarter show that this optimism was short-lived.

Consumer confidence in the Eastern Cape, where the DA won Nelson Mandela Bay Metro, fell 37 points to -8, having climbed 29 points in the third quarter. Similarly, after improving by 11 points between July and September, when a coalition of opposition parties took over Pretoria and Johannesburg, confidence in Gauteng fell 13 points to -8.

This about-turn in these two provinces may reflect the realisation that change at local-government level is not a panacea for dismal economic and employment growth.

Turning an economy around takes time. And any sustained change in consumer confidence, whether positive or negative, will be driven at national level.

There is a severe lack of confidence among South African households. For context, consumer confidence was at current or lower levels on only three occasions between 1994 and 2014. In the two years to the end of 2016, the index touched these lows four times.

To find a comparable period of weak consumer confidence, we need to go back to the fourth quarter of 1984, which was the start of six consecutive quarters of consumer confidence at or below -20.

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The second half of the '80s delivered the second-lowest half-decade of economic performance since the end of World War 2. It was also a period characterised by significant rand weakness, low business confidence, high inflation and high interest rates. Inflation peaked above 20% in 1986, and the prime interest rate hit 25% in 1985.

While the current downward trend in the business cycle is not as severe as that of the mid-'80s, there are similarities.

The past five years have also delivered sustained low growth. The rand depreciated from R11.50 to the dollar at the beginning of 2015 to just below R17 in January of 2016. Business confidence fell from above the key 50 mark in the final quarter of 2014, to average just 37 last year.

By comparison, the rise in inflation has been more muted, ranging between 4% and 7% in the past two years.

This has invited a more measured response from the Reserve Bank. Despite the immense pressure on South Africa's inflation from domestic and global forces, the bank has only had to raise rates by 125 basis points, taking the prime interest rate to 10.5%. By contrast, several of our peers had to raise rates much more to rein in inflation and stabilise their currencies.

These are the stability-enhancing properties of inflation targeting and also an argument for not fixing what is not broken.

These two periods of low confidence also share another common denominator: political noise and a refusal or inability to reform.

In the mid-'80s, the apartheid government faced the prospect of greater international sanctions and reduced access to international funding. This was due to its stance on human rights and refusal to work towards a fair society that provided equal opportunities for all citizens.

While not as severe, our predicament today is not too dissimilar. Despite repeated calls to implement structural reforms that will lead to more inclusive growth and a reduction in poverty and our ever-increasing inequality, progress has been insufficient.

The result is lower growth and employment than is necessary.

Nxedlana is FNB chief economist