Households are likely to endure more pain as they will be facing not only a higher cost of living, but also an increased cost of borrowing.
Consumer confidence in Africa sunk by 5 points in June as the index slid from 6 to 1. This follows from a deterioration in the index of current economic conditions and index of future expectations both of which fell by 7 and 4 points respectively.
Generally, the household indices underperformed this month. Although both the purchasing power and personal financial situation indices rose by a single point, the household income index faltered by staggering 15 points while the discretionary spending index weakened by 6 points. Moreover, whereas the general country economic conditions index ticked up by a point, the general city economic conditions index dwindled by 8 points and the job prospects index stumbled by 6 points.
Taking into consideration the performance at the individual country level, consumer sentiment waned in six out of the seven countries tracked in the index. This includes Cameroon, Ghana, Ivory Coast, Kenya, Nigeria and South Africa. Ivory Coast was the worst-performer of the month as its index shrunk by 13 points falling to 0 from 13. Meanwhile, consumer confidence in Tanzania heightened for a second consecutive month with the index gaining another 14 points rising to 25 from 11.
After improving by one-point in May, KASI’s global CCI subsided by 5 points in June declining from 6 to 1. The slip in consumer sentiment is associated with the pessimistic outlook among households on both current and future economic conditions as the index tracking the former decreased by 7 points while the index trailing the latter slumped by 4 points.
Certainly, Africa has not been immune to high inflation which is a phenomenon that central banks around the world continue to grapple with. For example, in Ghana, the annual inflation rate in June hit 29.8% which is the first time since January 2004 that inflation in the country surpassed 29%. According to data from Ghana’s Statistical Service, in comparison to Q4 2021 where inflation averaged under 12%, inflation in Q2 2022 averaged 27%. Consequently, disheartened by the cost of living, Ghanaians held protests in the capital city at the end of June calling for reforms to address this increase in the cost of living. Similarly in South Africa, the annual inflation rate in June broke through the upper limit of the South African Reserve Bank’s target range of 3% - 6% climbing to 7.4% which was the highest reading recorded since May 2009.
In addition to inflation, the depreciation of local currencies against the dollar has worsened the economic situation in the continent. In Nigeria for example, the naira, which traded at N565 to the dollar at the unofficial/black market in the beginning of the year, has lost 8.85% of its value and was trading at N615 to the dollar by the end of June. This black-market boom is a result of the Central Bank of Nigeria restraining to supply its diminishing foreign currency reserves in the Nafex, Nigeria’s official market for foreign currency transactions, where the naira is trading in the region of N420 to the dollar therefore giving a considerable spread between the two markets. This trend is also happening in Kenya where the Kenya shilling weakened against the dollar in June and is expected to depreciate further ahead of the August 2022 elections.
Given the steep rise in inflation as well as the depreciation of currencies, central banks across the continent have indicated their intention to utilise monetary policy and raise interest rates so as to “cool” the economy. In an interview with Bloomberg, the Governor of the South Africa Reserve Bank stated that the possibility of a 50-basis point hike is not off the table as the country seeks to tame inflation back to its target range. While this would be an unconventional move to the usual 25-basis point hike in interest rates, it may be necessary considering the unprecedent levels of inflation. Nevertheless, households are likely to endure more pain as they will be facing not only a higher cost of living, but also an increased cost of borrowing.
Discretionary spending sinks into negative territory as household incomes, job prospects and general economic conditions in the city regress.
The performance of the household indices in June are a reflection of the strenuous times within which we find ourselves. At the forefront is the pessimism among households on the general economic conditions. Whereas the country economic conditions index moved up by a single point, the city economic conditions index faltered by 8 points descending from 19 to 11. This pattern in indicative of how difficult it has become to live in urban areas in comparison to rural areas. Notwithstanding the increased cost of transport that urban residents must cope with in order to go to work and earn a living, urban residents have no option but to confront the higher cost of food at the shops and markets as majority do not have land within which they can undertake subsistence farming unlike their rural counterparts.
As a result, residing in the city is more costly than residing upcountry. Further, despite a slight improvement in the purchasing power and personal finance indices both of which climbed up by a single point, the household income index crumbled by 15 points receding to 11 from 26 suggesting that expenditure is likely to shrink in the near-term. Unfortunately, the job prospects index continued on its downward trend from May as the index collapsed by another 6 points in June falling to -52 from -46. Discretionary spending also tumbled this month with the index moving to negative territory as it dipped by 6 points from 5 to -1 implying that the priority for households is to ensure they can manage their regular expenses.
Floods and landslides in Ivory Coast causes consumer confidence in the country to plummet while consumer sentiment in Tanzania soars.
Focusing on the countries tracked in our index, Tanzania was the sole country to witness a boost in its consumer confidence as its index surged by 14 points maintaining its upward trajectory from May. The other countries i.e. Cameroon, Ghana, Ivory Coast, Kenya, Nigeria and South Africa all recorded a slump in their consumer sentiment indices with Ivory Coast undergoing the largest decline of the month as its index disintegrated by 13 points.
With respect to Tanzania, the expansion in its consumer sentiment can be attributed to its index of future expectations which advanced by 24 points as its index of current economic conditions contracted by 11 points.
While the country is also facing higher levels of its consumer price index as reported by the National Bureau of Statistics, the future appears to be much more positive for the country. The East African Business Council (EABC), an advocacy body of private sector associations and corporates from the East African Community (EAC) partner states, recently released its Business Barometer which is an index that captures the sentiment of business stakeholders in the partner states across 5 dimensions: 1) improvements in the business climate; 2) governments interventions for business recovery; 3) businesses performance; 4) an end to the adverse effects of the pandemic; and 5) recovery from the losses suffered during the pandemic. In its report, EABC noted that Tanzanian businesses stood out with an optimistic view across all dimensions unlike the other EAC member states. Furthermore, the government has received grants from the European Union and Swedish government amounting to approximately USD 450 million aimed at improving access to income-earning opportunities and socio-economic services for targeted poor households. All this optimism lifted the household indices apart from the job prospects index which slackened by 26 points. The country economic conditions index accelerated by 26 points while the city economic conditions index gained 24 points. Finally, the purchasing power, personal finance, household income and discretionary spending indices all progressed by 26, 24, 20 and 3 points respectively.
Turning to Ivory Coast, June was a challenging month for the country. Unluckily, Abidjan, its capital city, was hit with severe floods which caused landslides that had a catastrophic effect on the nation especially the city and its surroundings. A rapid assessment conducted by the Red Cross Society of Côte d'Ivoire (RCSCI) shows that nearly 2,000 households were affected in 10 localities as the floods and subsequent landslides led to the destruction of houses and schools, the collapse of roads, flooding of markets and contamination of wells among other damages. This disaster is expected to exacerbate the economic situation in Ivory Coast which was already projected to dampen this year according to the International Monetary Fund (IMF). In June, the IMF stated that Ivory Coast’s economic growth is forecast to slow to 6% in 2022 compared to the 7% in 2021 because of subdued global demand, worsened terms of trade, increased uncertainty and inflation which is expected to rise to 5.5% this year from 4.2% in 2021. These floods and weakened economic outlook resulted in a poor performance in the household indices. With the exception of the discretionary spending index which ticked up by 2 points, all the other indices dropped in June. The household income index disintegrated by 36 points while the purchasing power, personal finance and job prospects index all slipped by 11, 9 and 6 points respectively. Ivorians also reported a softening in economic conditions as both the country and city economic conditions indices dwindled with the former sliding by 8 points and the latter crippling by 23 points primarily due to the floods.
With economic conditions deteriorating in urban centers, retailers situated in these areas should consider strategies to attract urban residents whose real wages have diminished
Consumer sentiment in the first half of 2022 has been extremely disappointing as the index has fallen from 9 at the beginning of the year to 1 at the end of the June which is an all-time low for this year so far. While we expected 2022 to be a recovery year, this has not been the case considering new hurdles particularly the Ukraine war that significantly altered the direction global economic recovery. The data shows that household incomes are also at all time-low for the year and while the purchasing power does appear to be improving in recent months albeit modestly, it is still below the levels observed earlier this year. Additionally, the data also suggests that the priority for households in the first half of the year is to halt their expenditure on discretionary items and use these funds to meet their regular expenses/purchases in the face of increased living costs.
This observation is certainly not favourable as it means that retailers would expect their average sales volume to be lower for the first half of 2022 compared to the second half of 2021. The situation could get worse if the cost of living further escalates and similarly, the cost of borrowing soars due to tightening of monetary policy as a tool to curb inflation. Nevertheless, it is clear that in most countries, the economic conditions in urban centers are less favourable than other parts of the country. As such, retailers situated in urban areas should strive to implement strategies that are conducive for residents in these areas whose real wages have shrunk. These strategies could include segmented pricing, bundle pricing, discounts and allowances among others. While this would impact profitability in the short-term, it may lead to an increased customer base that could be beneficial for the future. However, firms must conduct proper market research and evaluate what strategies will be effective for their model and overall ambition.
“As we begin the 2nd half of 2022, uncertainty in the global economy still persists. While it appears that inflation is beginning to taper off as central banks have responded accordingly through monetary policy, growing geopolitical tensions between China and Taiwan could potentially set as back. Therefore, to be effectively prepared, retailers must pay attention to the context within which they operate and monitor information at the firm level regarding aspects of their sales and production, and proactively develop strategies to respond to any eventuality.”
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