Rising inflation in an environment where the effects of the Covid-19 pandemic are lingering is particularly worrying because central banks will respond by raising interest rates.
KASI’s global consumer confidence index (CCI) receded by 9 points in January after a positive performance in the last quarter of 2021. The decline in the CCI is associated with the deterioration in the index of current economic conditions and the index of future expectations both of which fell by 8 and 10 points respectively.
Unfortunately, all household indices stumbled this month. The household income index sunk by 12 points while the personal finance index dipped by 5 points. Furthermore, spending among households weakened as the discretionary and household spending indices decreased by 14 and 6 points respectively. General economic conditions for both the city and country were subdued with the indices plummeting by 11 and 13 points respectively while job prospects continued on its downward trend observed in December.
In a similar fashion to the global CCI, all countries tracked by the index experienced a disintegration in consumer sentiment. Ghana endured the largest collapse as its index plunged by 18 points while both Cameroon and Nigeria saw their consumer confidence indices dwindle by 11 points. For Kenya, Ivory Coast, South Africa, and Tanzania, their indices slid by 5, 2, 8, and 9 points respectively.
After attaining an all-time high in December 2021, consumer confidence in Africa crumbled by 9 points in the first month of 2022 falling from 18 to 9. This downturn in consumer sentiment can be attributed to the pessimism among households on the current economic conditions and the future. The indices trailing these components faltered in January with the index of current economic conditions declining from -17 to -25 and the index of future expectations dropping from 32 to 22.
While the emergence of the Omicron variant in late 2021 did not result in a serious public health crisis in Africa, the disruption it caused in other regions across the world meant that Africa was not immune from the economic turmoil resulting from the disruption. In its latest World Economic Outlook Update released in January 2022, the International Monetary Fund (IMF) indicated that global recovery in 2022 is now in a weaker position than previously expected citing a myriad of reasons including rising energy prices and supply-chain disruptions (in addition to Covid-19) that have resulted in higher and more broad-based inflation. Therefore, in response to higher inflation, central banks (especially the Federal Reserve and the European Central Bank) are expected to tighten monetary policy which has resulted in the IMF downgrading global growth projections for 2022.
Following a softer-than-expected second half in 2021 and a weaker outlook for investment due to subdued business sentiment, the growth forecast for sub-Saharan Africa was revised down to 3.7% from 3.8% with Nigeria’s economy expected to expand by 2.7% while South Africa is projected to grow at 1.9% in 2022 (IMF, 2022). These developments especially on monetary tightening appear to be affecting households given that the debt situation in Africa is already unfavorable and rising rates will add to the cost of borrowing which African governments have relied on to support their interventions. As such, if governments are unable to tap into international markets for liquidity due to the higher cost burden, then financing for key social programs could dissipate which would be detrimental for households.
Household expenditure plunges amidst diminishing incomes and a weakened economic outlook
The pessimism in the global indices was also mirrored in the household indices all of which tumbled in January. Following an increase in consumption for discretionary products during the festive season, households suppressed their expenditure on these items in January as the discretionary spending index diminished by 14 points returning back to pre-festive season levels. The purchasing power and household budget indices also fell by 6 and 5 points respectively with households reporting lower income levels as revealed by the household income index which shrunk by 12 points.
With regards to general economic conditions, households reported a negative perception of the economic conditions for both the country and the city. The index for general economic conditions for the city receded by 11 points while the index for general country economic conditions worsened by 13 points. Unlike these aforementioned indices which had previously been moving in a positive direction, job prospects continue to spiral downwards into 2022 as the index decreased by an additional 4 points hence closing in on levels witnessed at the onset of the Covid-19 pandemic.
New tax measures and growing debt concerns have caused a slump in consumer confidence in Ghana
All countries considered in our index experienced a slump in their consumer confidence indices. Ghana underwent the largest drop as its index nose-dived by a staggering 18 points sinking into negative territory (17 to -1). Cameroon and Nigeria were second on the list of this month’s worst performers as their confidence indices dipped by 11 points. Meanwhile, consumer confidence for Ivory Coast, Kenya, South Africa, and Tanzania withered by 2, 5, 8, and 9 points respectively.
Focusing on Ghana, the Ghanaian government introduced new tax measures aimed at increasing the country’s tax-to-Gross Domestic Product (GDP) ratio from 12% to 16.5% with a view to enhancing domestic resource mobilization required to implement its programs. These new tax measures included an Electronic Transaction Levy (E-Levy) that sought to broaden the tax base by targeting individuals operating in the digital space. Additionally, concerns in Ghana regarding the country’s debt levels and its ability to finance its expenditures as well as interest payments were prominent in January. Even though stronger commodity prices are expected to be favorable to Ghana’s economy, its budget deficit of approximately USD 6 billion (37 billion Ghanaian cedis) means that the country’s debt situation is likely to worsen (Reuters, 2022). In fact, the World Economic Outlook Report of October 2021 showed that Ghana’s debt-to-GDP ratio stands at 83.5% which is higher than the 77% threshold recommended by World Bank. Further, according to the credit rating agency S&P Global, 46% of government revenues are expected to service interest payments which is the second-highest ratio in the world after Sri Lanka, another country seen facing significant default risk.
These developments in Ghana had an impact on Ghanaian households as suggested by the indices for January. At the forefront, the rise in taxes contributed to a reduction in households’ incomes as indicated by the household income index which sunk by 19 points. Because of lower incomes, households also reported a reduction in their budgets, purchasing power, and discretionary spending as the indices tracking these components collapsed by 12, 27, and 28 points respectively. The debt distress in the country also means that households had a pessimistic outlook on the future. Consequently, Ghana’s indices on general economic conditions for both city and country plummeted by 24 and 23 points respectively. On a positive note, Ghana’s job prospects index increased by 6 points which is contrary to the global job prospects index which, as earlier noted, weakened.
Retailers should consider having cash on hand to finance their operations in light of reduced household expenditure and rising interest rates.
Evidently, 2022 has started off with concerns among households on prevailing and future economic conditions. The macroeconomic developments taking place at the global stage such as rising inflation and the resulting monetary tightening to curb inflation are having an effect on households. Moreover, policies that are being taken at the individual country level, like the new tax measures in Ghana, are having a compounding effect on some households.
These headwinds experienced by households will certainly affect retailers. With households’ incomes and purchasing power falling due to the rise of inflation (and tax in Ghana), the household budgets will be confined. This means that consumption, especially for discretionary products, will drop as expenditure on these products by households will be constrained. Therefore, the high-spending environment which retailers enjoyed in the festive season will fade, at least at the beginning of this year. As such, in an environment where interest rates are expected to tighten, it is critical for retailers to limit their reliance on lenders to bankroll their operations due to heightened costs, and instead, they should consider keeping cash-on-hand to finance their activities.
“Rising inflation in an environment where the effects of the Covid-19 pandemic are lingering is particularly worrying because central banks will respond by raising interest rates. Therefore, businesses that were dependent on financing from banks to support their operations are likely to face higher borrowing costs which will affect their bottom-line.” Davies Nyachieng'a, Economist at Kasi Insight
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