The sharp rise in November is likely to be due to people's expectations of a bumper festive season, to reduced fuel prices in November and to the expectation of the December fuel price decrease. This suggests that the rise in interest rates announced last week by the Reserve Bank will be unlikely to slow festive season spending to any significant degree.
Two components
The MSI comprises two components: one examines how people are feeling about their economic circumstances (prices, economic circumstances, availability of jobs and business conditions) now; the other looks at their expectations of these same circumstances six months into the future. The figures for both components rose in November (by twenty and nine points respectively) compared with October. Compared with this time a year ago, whilst the overall index has risen 15 points, the current component has risen by 30 points (151 to 181) and the expectations component has risen 11 points (from 125 to 136). Hence, the rise both quarter-on-quarter and year-on-year has been largely a result of people feeling very much better about their current circumstances and somewhat optimistic about the future.
The sharp rise in the current component in this final reading for 2006 is largely driven by a much better sentiment over people's own current personal economic circumstances and over their much more positive perceptions of the current business climate. Again, this points to a record spending spree over the festive season.
The rise in the expectations component is due to expectations again that people's personal financial circumstances will continue to improve, as well as expectations of an improving business climate over the next six months. There is also a slightly improved perception around the ease of finding jobs in the next six months. Inflationary fears, after rising in the first half of the year, have now stabilised. Compared with this time last year, the main dynamic is a better feeling about people's current economic circumstances, a perception of a much better business climate as the year ends and high expectations for this to continue into 2007, along with a greater ease in finding jobs in 2007.
Who changed?
With May 2002 as the base of 100, the table below shows how sentiment has changed since the end of 2005:
This shows that, amongst whites, after a record MSI reading of 137 in May this year, there was a major drop to 115 by August, this occurring across almost all the indicators, both current and in terms of expectations of the following six months. Only a partial recovery for this population group has occurred. For blacks, the strongest decline took place between August and October but that has more than been made up now. The MSI for coloureds peaked in August and, after a drop in October, is again at record levels. The Indian/Asian figures are more variable, showing a large drop in August but are now at record highs.Our take-out
Clearly, the middle of 2006 was a difficult time for many people, with rising fuel prices, higher than average food inflation (varying from 7% to 9% - meat alone is 20% more expensive now than a year ago) and the prospect of an extensive round of interest rate increases - there have been four successive rate increases in the last six months. However, exchange rates have softened somewhat, stimulating the manufacturing and export sectors. Further, inflation overall is still well within the Reserve Bank's target band. People are looking at the end of the year with confidence and are expecting a very positive 2007.
Background to the MSI
"Sentiment" is said by many to be one of the key drivers in many markets - financial, consumer, durables, the stock market and so on. Research Surveys (Pty) Ltd, South Africa's leading marketing insights company, has developed a Market Sentiment Index (MSI) ideally suited to SA conditions (as a developing country) to provide decision-makers in all parts of the economy with some idea of people's sentiment towards the economy and, hence, their future well-being.
This index examines people's current and future perceptions of the economy in terms of job availability, business conditions, general economic conditions, prices and inflation, likely income, and the effects of AIDS and crime on the economy. These two constructs - "where are we now?" and "where are we going?" are then combined into an overall index. The future perceptions measure, in particular, can be a leading indicator of changes in people's spending patterns if it changes over time by any material amount. The index is calculated via a survey every two to three months of 2 000 metropolitan adults aged 18 years and over, sampled from the major metropolitan areas of South Africa. In the latest reading, 1 260 blacks, 385 whites, 240 coloureds and 115 Indians/Asians were questioned. The overall margin of error is less than 2.5%
The index was first measured in May/June 2002. The MSI is tracked regularly, using the first study in May/June 2002 as the benchmark to report future changes. The study is conducted with a sample of 2 000 adults (male and female) in South Africa's main metropolitan areas, and is representative of all population groups in those areas.
