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Surging inflation & climbing interest rates dampen African Economy in August 2022

Updated: Sep 14

Our analysis suggests that the conditions will continue to be unfavorable for retailers in both the essentials and discretionary goods space.

  • Consumer sentiment in Africa receded by 5 points in August following a modest rebound in the previous month. Both the index of future expectations and index of current economic conditions worsened with the former losing 3 points and the latter falling by 10 points.

  • All of the household indices tracked deteriorated this month. After gaining 5 points in July, the discretionary spending index receded by 12 points. This was also the case for general city economic conditions, job prospects and household income indices which dropped by 2, 7 and 2 points respectively following an increase last month. At the same time, the purchasing power and personal finance indices continued on a downward trend sliding by 4 and 6 points respectively while the general country economic conditions index weakened by a point after stalling in July.

  • Focusing on the countries tracked by the index, consumer confidence advanced in Cameroon, Ghana and Kenya with Kenya recording the largest gain of 8 points thereby moving into positive territory as its index climbed from -2 to 6. On the contrary, consumer sentiment in Nigeria, South Africa and Tanzania dwindled with South Africa undergoing the biggest decline as its index decreased by 39 points. Meanwhile, consumer confidence in Ivory Coast remained unchanged in August.

KASI’s global CCI shifted into negative territory for the first time since March 2021 as the index slipped by 5 points from 2 to -3. This move is a reversal from July’s expansion of a single point. The downturn in consumer sentiment is associated with a disintegration of both the index of current economic conditions and index of future expectations which crumbled by 10 and 3 points respectively.

African governments continue to grapple with the rising inflation which has affected the global economy. In fact, some countries are witnessing levels of inflation that have not been seen since the early 2000s. For example, Nigeria’s annual inflation rate for August 2022 hit 20.52 % which is the highest level since September 2005. Similarly in Ghana, annual inflation climbed to 34% in August which is a record-high since 2001. The surge in prices has affected the cost of production in the continent as illustrated by the producer price index for some countries e.g. Ghana and South Africa. According to the Ghana Statistical Service, the producer price inflation rate for this month rocketed by 46% on an annual basis primarily due to inflation in the manufacturing of coke, refined petroleum products and nuclear fuel. Ghana’s producer price inflation report shows that the inflation rate in the petroleum sub-sector has escalated from 36 % in January 2022 to 170.3% in August.

Furthermore, given the fact that majority of African countries are net-importers, the rise in global prices has led to a depreciation of local currencies and increased import bills. Data from the Central Bank of Kenya shows that, between January and August this year, the Kenyan shilling has lost 6% of its value against the US dollar. Consequently, Kenya’s import cover, which measures the number of months of imports that can be covered with foreign exchange reserves available with the central bank, has fallen to 4.46 months which is the lowest level in six and a half years. In order to deal with the inflationary pressures and currency volatility, central banks are raising their interest rates significantly. For example, the Bank of Ghana held a special monetary meeting on 17th August where they hiked their benchmark interest rate by 300 basis points to 22%; the biggest increase since 2002.

All these developments are certainly having a negative impact on consumers’ perception of current economic conditions and the future state of the economy as revealed by the indices trailing the two aspects.

Real wages diminish and household expenditure softens amid rising inflation and interest rates

The negative sentiment of the current and future conditions is reflected in the performance of the household indices all of which deteriorated this month. Households indicated their pessimism in general economic conditions for both the city and country as the indices focused on these two elements shrunk by 2 and 1 point(s) respectively. Job prospects also waned in August as the index sunk by 7 points from -47 to -54 thus erasing all of the gains from last month. The expenditure situation got worse for households this month. Following an expansion of 6 points in July, the discretionary spending index withered by 12 points falling from 5 to -7 hence attaining the lowest level for 2022. Additionally, the purchasing power for households plummeted further as the index gave up another 4 points, dropping from 3 to -1, and landing in negative territory for the first time since September 2020. Concerning the income indices, their performance was also disappointing. The household income index slid by 2 points while the personal finance index declined by 6 points. Evidently, the soaring inflation has affected households as their real wages have diminished significantly leading to cutbacks in expenditure. To make matters worse, the higher interest rates means that the option for borrowing is no longer feasible due to the amplified interest payment costs associated with borrowing.

Consumer confidence in South Africa reaches an all-time low while peaceful elections in Kenya causes sentiment to strengthen

With respect to the countries considered in the index, Nigeria, South Africa and Tanzania all saw consumer sentiment in their countries fade with South Africa’s index recording the biggest slump of 39 points. Meanwhile, consumer sentiment heightened in Cameroon, Ghana and Kenya with Kenya’s index experiencing the largest gain of 8 points. In Ivory Coast, consumer confidence stagnated at last month’s level.

Consumer confidence in Kenya accelerated by 8 points in August ascending from -2 to 6. The improvement in consumer sentiment is a reflection of renewed optimism among Kenyans especially on current economic conditions which, after weakening by 4 points last month, expanded by 9 points. At the same time, the index of future expectations advanced by 7 points reaching the highest level since February. August was a decisive month for Kenya, as the country held presidential elections to elect the country’s fifth president since independence. Despite fears among the international community on the possibility of election-related violence, the process was extremely smooth with virtually no reports of violence in the country. This was great for businesses in the country particularly those located in the city as their property was not looted. In addition to political stability, the Kenyan government continued providing relief to its citizens by once again subsidizing the fuel prices in August hence enabling pump prices to remain the same. Households in Kenya appeared to be thrilled by the situation as illustrated by the various indices. At the forefront, households reported an improvement in general city and country economic conditions as both indices rose by 9 and 8 points respectively. Expenditure also bulged with the discretionary spending index escalating by 17 points and the household spending index growing by 9 points. Household incomes were also boosted with the household income index widening by 3 points while personal finance index increased by 4 points. The promise of youth employment and financial support, a platform which the President-elect campaigned on, seemed to have marginally enhanced the outlook on jobs following his victory as the job prospects index strengthened by 2 points.

Turning to South Africa, the performance of its consumer confidence index has gone from bad to worse. Following a decline of 14 points in July, the index plunged by an additional 39 points this month decreasing from -48 to -87 which is the lowest level ever realized since the inception of the index. Both the index of future expectations and index of current economic conditions tumbled in similar fashion with the latter losing 31 points and the former collapsing by 42 points. In August, hundreds of South Africans protested in the executive and legislative capitals of Pretoria and Cape Town against inflation which soared to a 13-year high in July. The protests were led by the trade union group Congress of South African Trade Unions (COSATU), a long-time ally of the governing African National Congress. While data from Statistics South Africa shows that the annual inflation rate reduced from 7.8% in July to 7.6% in August, Eskom, the primary supplier of electricity in South Africa indicated that they would begin load-shedding (or power-rationing) due to a shortage in generation capacity which will be detrimental for local manufacturers who are already facing challenges with managing their production costs. The most recent Producer Price Index report released in July observes that the annual producer price inflation was 18% in July 2022 which is a new 14-year high. As such, South African households expect the situation to worsen. Despite a modest increase in the job prospects index of 2 points, both the general city and country economic conditions indices dipped by 40 and 44 points respectively. The expenditure and income indices also disintegrated with the discretionary and household spending indices faltering by 64 and 28 points respectively, while the household budget and income indices respectively slumped by 59 and 42 points.

With a surging dollar, retailers depending on imports need to institute measures to protect their bottom-line against currency-related losses

From a continental perspective, it is clear that the term subdued best describes the performance of consumer sentiment in 2022. This is not only supported by the global consumer confidence index, but it is also backed at the individual country level where sentiment indices for most countries are below the January levels. However, the data shows that there are some countries which appear to be experiencing some form of recovery in consumer confidence while on the other hand, there are those countries whose situation is further deteriorating. The big concern for countries like Kenya who seem to be on the way to recovery is whether consumer sentiment will relapse and subsequently crash in the upcoming months.

In spite of this, our analysis suggests that the conditions will continue to be unfavorable for retailers in both the essentials and discretionary goods space. The situation will be even tougher for retailers whose operations depend heavily on imports because, according to the dollar index (DXY) which is at its highest level since mid-2002, the value of the US dollar is on an upward trend. Therefore, these retailers must re-evaluate their operations to minimize the impact of an appreciated dollar on their bottom-line. The notion of passing on the increased cost to consumers may prove to be difficult especially in the discretionary goods space as this is going to result in further tightening by households who are currently faced with reduced real wages and diminishing job prospects. Instead, retailers may consider mechanisms to hedge against the rising dollar, or they could opt to source their inputs from local suppliers which will depend on their contractual obligations with international suppliers.

“This is a great opportunity for African countries to fill the vacuum within the global supply chain for crops such as wheat that has been created by the Russo-Ukrainian war. Not only would this be able to reduce import-dependency but it could also be an avenue for income-generation. The onus is therefore on African governments to determine the feasibility of such a strategy and, where it turns out to be worthwhile, the responsible government must work prudently on the execution.”

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