Business lacks confidence
BUSINESS CONFIDENCE: Voting with their feet
The fact that
growth in private sector fixed investment is still below 3%
tells us the private sector has no strong faith in South
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.