- Middle-class South African consumers are facing severe financial strain due to rising inflation, higher costs, and economic challenges, according to Deloitte’s latest Consumer Tracker.
- The rising cost of food is forcing consumers to make trade-offs and become more frugal, while persistent load shedding and higher fuel prices are exacerbating the inflation rate, which has surpassed the South African Reserve Bank’s target range.
- Ongoing economic struggles, tighter lending conditions globally, and business continuity issues such as load shedding are putting more pressure on middle-class consumers, softening consumer demand, and negatively impacting firms’ growth outlook, leading to spillovers on the fiscal budget.
Deloitte, a leading financial services firm, has recently highlighted the challenges faced by South African middle-class consumers and businesses due to rising inflation, elevated costs, and ongoing economic struggles. The firm’s Consumer Tracker for April revealed that 41% of consumers surveyed believe their financial position has deteriorated in the past year, with many expressing concerns about their financial circumstances.
The data suggests that the increase in food prices is forcing consumers to make greater trade-offs, such as purchasing cheaper meat, opting for store brands, and selecting less expensive ingredients. Additionally, South Africans are becoming more frugal by reducing food waste, focusing on essential purchases, and buying less than they desire.
Persistently high food inflation and increased fuel prices have driven the inflation rate in South Africa beyond the South African Reserve Bank’s (SARB) target range of 3%-6%. In February 2023, headline inflation rose marginally from 6.9% in January to 7%. Contrary to market expectations, inflation continued to rise in March, reaching 7.1%.
The primary driver of rising inflation is the surging food prices, which saw a 14% YoY increase in March. Deloitte attributed this to the ongoing pressure caused by load shedding. Furthermore, FNB’s Consumer Confidence Index (CCI) plummeted to -23 points in Q1 2023 (down from -8 in Q4 2022) – the third lowest CCI on record since 1994. This decline is expected to result in reduced durable goods sales this year.
Deloitte warned that load shedding, which is anticipated to persist throughout the second half of 2023, could lead to further price hikes for consumers. Retailers and consumer goods companies will likely face increased spending on power backups, subsequently raising their operational costs, which will eventually be passed onto consumers as input costs.
The financial services firm noted that many higher-income households have started investing in backup and renewable power solutions or are considering these options due to the recently announced tax rebate for the fiscal year 2024. This may require certain purchasing trade-offs.
Market analysts and economists predict another 25 basis point hike this year by the ‘relentless’ Reserve Bank, following its ninth consecutive interest rate hike of 50 basis points at the end of March. The SARB considers the risks to inflation to be skewed to the upside, with food price inflation and core goods inflation projected to exceed previous estimates for the year.
Deloitte also raised concerns about the heightened risk profile of economies like South Africa, which rely on foreign capital to finance their growing current account deficits amidst tightening global lending conditions. This situation is expected to exert more pressure on middle-class consumers, soften consumer demand, and dampen investment decisions and hiring for firms, ultimately impacting the growth outlook.
The firm emphasized that business continuity issues, such as load shedding, could negatively affect the private sector’s margins and profitability in the coming months. This may lead to spillovers impacting the fiscal budget, for instance, through reduced corporate income taxes.