Busi­ness lacks con­fi­dence

BUSI­NESS CON­FI­DENCE: Vot­ing with their feet

Finweek English Edition - - FRONT PAGE - GRETA STEYN

The fact that

growth in pri­vate sec­tor fixed in­vest­ment is still be­low 3%

tells us the pri­vate sec­tor has no strong faith in South

Africa’s econ­omy

BUSI­NESS PEO­PLE IN South Africa are still vot­ing with their feet. Their lack of con­fi­dence in SA’s econ­omy is clear from their lack of spend­ing on fixed in­vest­ment or cap­i­tal ex­pen­di­ture (capex). With­out pri­vate sec­tor capex pick­ing up markedly, SA’s growth and em­ploy­ment prospects for the fu­ture will re­main un­der pres­sure.

Al­though a num­ber of busi­ness con­fi­dence in­di­ca­tors are re­leased reg­u­larly, the one that re­ally tells the story is pri­vate sec­tor capex. That’s spend­ing on new ma­chin­ery, plant, fac­to­ries, equip­ment, build­ings and the like. It gen­er­ates growth both when the spend­ing takes place and for the fu­ture, when the as­sets are used to grow the busi­nesses.

Such spend­ing has been very slug­gish in SA, de­spite a tar­get of push­ing over­all in­vest­ment spend­ing (in­clud­ing the pub­lic sec­tor) up to 25% of gross do­mes­tic prod­uct. Real growth in capex by the pri­vate sec­tor may have ac­cel­er­ated but not to the ex­tent that would show true faith in SA’s econ­omy. The SA Re­serve Bank’s lat­est Quar­terly Bul­letin re­ports real gross fixed cap­i­tal for­ma­tion by pri­vate busi­ness en­ter­prises ac­cel­er­ated from an an­nu­alised rate of in­crease of 1,6% in fourth quar­ter 2010 to 2,7% in first quar­ter 2011.

While strong growth in fixed in­vest­ment al­ways lags the busi­ness cy­cle com­ing af­ter house­hold de­mand has al­ready picked up sharply, this time the lag is longer and growth more slug­gish than could be ex­pected at this point in the busi­ness cy­cle. The fact that growth in pri­vate sec­tor fixed in­vest­ment is still be­low 3% tells us the pri­vate sec­tor doesn’t have strong faith in SA’s econ­omy.

This seems to be borne out by other busi­ness con­fi­dence in­di­ca­tors, and this doesn’t au­gur well for fu­ture capex. The Rand Mer­chant Bank (RMB)/Bu­reau for Eco­nomic Re­search ( BER) busi­ness con­fi­dence in­dex (BCI) fell by seven in­dex points, from 55 in first quar­ter 2011 to 48 in the sec­ond quar­ter. An in­dex level just be­low the neu­tral 50 mark means around half of those re­spon­dents sur­veyed are sat­is­fied and the other half dis­sat­is­fied with pre­vail­ing busi­ness con­di­tions. For­tu­nately, busi­ness con­fi­dence re­mains at a higher level than dur­ing sec­ond half 2010.

Dur­ing the sec­ond quar­ter, busi­ness con­fi­dence de­clined in three of the five sec­tors mak­ing up the RMB/BER BCI. The sec­tors where sen­ti­ment de­te­ri­o­rated are all re­lated to the trade sec­tor: namely, the re­tail, whole­sale and ve­hi­cle sec­tors. Con­fi­dence re­mained un­changed in the man­u­fac­tur­ing sec­tor, while it in­creased slightly in the build­ing sec­tor.

Con­fi­dence in the re­tail sec­tor de­clined from 58 to 47 in­dex points dur­ing the sec­ond quar­ter. In the whole­sale sec­tor, con­fi­dence dropped from 65 to 47, while new ve­hi­cle dealer con­fi­dence eased from 84 to 76. RMB/BER says in its press re­lease that lower con­fi­dence in the trade sec­tors can mainly be at­trib­uted to some weak­en­ing in house­holds’ abil­ity to spend.

Wage in­fla­tion – though still run­ning at a com­par­a­tively high level – is mod­er­at­ing at the same time as in­fla­tion is ris­ing. Con­se­quently, real growth in com­pen­sa­tion is be­ing squeezed. Si­mul­ta­ne­ously, job growth in the non-agri­cul­tural pri­vate sec­tor re­mains slug­gish, while the up­take of bank credit has been slow. It may be that grow­ing fears of prospec­tive higher in­ter­est rates are also start­ing to some­what dampen the busi­ness mood.

The SA Cham­ber of Com­merce and In­dus­try (SACCI) BCI reg­is­tered its low­est level since July 2010 dur­ing May this year. The SACCI BCI isn’t a true busi­ness con­fi­dence in­dex be­cause it isn’t a sur­vey of busi­ness peo­ple, as hap­pens with the RMB/BER in­dex. SACCI’s in­dex is com­piled by putting to­gether sta­tis­tics that tell us some­thing about the cur­rent state of the busi­ness cy­cle.

Al­though the SACCI BCI dipped by 1,1 in­dex points to 85,8 in May this year, it re­mained 3,8 points above the May 2010 level. That’s the sec­ond con­sec­u­tive month of de­cline in the in­dex.

The most im­por­tant in­di­ca­tor of busi­ness con­fi­dence re­mains pri­vate sec­tor capex, which is show­ing slug­gish growth.


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