Confidence in business hits a 9-year low
DATA RELEASED yesterday by the Rand Merchant Bank (RMB) and Bureau for Economic Research (BER) indicated that business confidence in the second quarter of this year slumped to levels last seen in 2009 largely driven down by persistent weak business activity.
The RMB/BER Business Confidence Index (BCI) plunged by 11 points to 29 points in the period, with nine out of ten respondents having said they viewed the prevailing business conditions as unsatisfactory. This means that business confidence has been below the neutral 50-point mark since the last quarter of 2014.
Ettienne le Roux, a chief economist at RMB, said yesterday that the sharp deterioration in sentiment reflected more than just the impact of increased political uncertainty, but that sluggish business activity had also knocked confidence.
“We last saw such despondency during the 2009 recession. Striking too is the fact that each of the five sectors covered in the survey – manufacturing, retail trade, wholesale trade, motor trade and the building sector – all had a BCI below 50 points,” Le Roux said.
Out of the five sectors surveyed, the motor trade saw the largest decline, with confidence tanking by 19 points to 11 points in the period under review. The manufacturing confidence saw confidence plunging by 12 points to 16 points, dragged down by poor domestic sales volumes and production levels being below capacity in the period.
Building sector confidence tanked from 42 points in the first quarter to 36 points in the period, due to a further sharp deterioration in business conditions for non-residential building contractors.
The retail sector’s confidence shed 10 index points to 35 points, while sentiment among wholesalers deteriorated by 7 points to 49 points, pulled down by weak consumer spending.
Le Roux said the fear was that the broad-based drop in confidence this time around was a precursor to the current business cycle downswing becoming even more pronounced in the period ahead.
“This is not a regular occurrence. In fact, over the past 42 years, it occurred only in 12 instances, the last of which was during the global financial crisis when it correctly signalled the onset of a cyclical domestic economic downturn.”
He added that it was concerning that the RMB/BER BCI had fallen in the way it has. “According to the Reserve Bank’s dating chronology, the current business cycle downswing is already 43 months in progress. This makes it the second longest one in South Africa’s history, only surpassed by the 1989 to 1993 downturn.”
According to Trading Economics, a data website, business confidence in South Africa has averaged 44.76 points from 1975 until 2017, reaching a record high of 91 points in the third quarter of 1980 and a record low of 10.20 points in the third quarter of 1985.
Kamila Kaplan, an economist at Investec, said the decline in confidence in the second quarter reflected the perception that economic weakness would be prolonged and increases the risk that pessimism will become entrenched.
‘“Depressed business confidence reflects expectations of suppressed future economic growth,” Kaplan said.
Meanwhile, the SA Chamber of Commerce and Industry (Sacci), yesterday said that trade conditions remained in negative with the Trade Activity Index (TAI) still below 50 points in May.
Sacci’s TAI was measured at 49 points last month, up from the 45 points recorded in April, while the seasonally adjusted TAI improved by two index points between April and May 2017 to 47 points in May.
However, on a yearly basis, the seasonally adjusted TAI has declined by two index points. The seasonally adjusted Trade Expectations Index declined by one index point to 48 points in May.
Richard Downing, an economist at the South African Chamber of Commerce & Industry said that it appeared that the recently announced recessionary conditions and junk status rating agencies were weighing on trade conditions.
“Apart from the recessionary conditions, respondents indicated that unstable and unpredictable economic policy, large shifts in currency value, political instability, lack of leadership and low levels of business and consumer confidence, make business management exceedingly difficult,” Downing said.