Depressed business in no mood to spend
OVER the past few years, the South African government has been on a belttightening exercise, which it has promised to accelerate in order to stabilise its debt and ward off a sovereign rating downgrade.
The Reserve Bank is in the midst of a rate-hiking cycle aimed at taming consumer inflation. There has also been a significant decline in South Africa’s export commodity prices.
These will continue to be headwinds to an already weak economy.
An increase in expenditure on fixed investment could have mitigated these headwinds and supported growth. However, the fixed investment channel as a source of growth is also closed to us at the moment.
In the past two years, real growth in fixed investment has been exceptionally low, contracting by 0.4% in 2014, followed by a slight recovery to a still weak 1.4% last year. For context, the post-1994 average growth is 5.5%.
Fixed investment can be disaggregated by type of asset (what is being invested in) or by type of organisation (who or what institution is investing).
Looked at by type of organisation, poor growth in spending on fixed investment is mainly due to the private sector (60% of total). Growth in fixed investment by state-owned enterprises (20% of total) has also slowed noticeably.
In contrast, growth in investment by general government, mainly local and provincial governments investing in roads, schools and clinics, remains relatively strong.
The fixed investment prospects are not rosy. Public sector fixedinvestment growth is likely to be moderate due to government belttightening and as the large public corporation projects approach completion. Moreover, low business confidence will further inhibit fixed investment by the private sector.
The RMB/BER business confidence index is a quarterly survey of executives in retail, wholesale, motor trade, construction and manufacturing. The latest survey, released last week, showed that, in the first quarter, business confidence was unchanged at 36.
That tells us that around two-thirds of the 1 750 industry respondents were not satisfied with prevailing business conditions. Manufacturers reported the lowest confidence levels, with 82% being dissatisfied. However, confidence is low across all surveyed sectors.
In fact, the recovery in business confidence since the 2009 recession has been muted. This partly explains the weak growth in fixed investment.
The persistently low levels of business confidence reflect the muted recovery in both global and domestic demand. However, they also reflect persistent constraints that have made it difficult for the domestic private sector to accelerate production in recent years. These include labour unrest that is sometimes protracted and violent, a shortage of electricity, haphazard regulations and perceptions of poor governance.
Manufacturers have in the past few years consistently cited the general political environment as their biggest constraint to doing business, above insufficient demand, interest rates and skilled labour shortages.
Domestic animal spirits are depressed. When there is low business confidence and heightened uncertainty, firms don’t invest. Instead, they adopt a defensive posture, choosing to hoard cash.
The investment that does take place tends to be in machinery to enhance efficiencies and in foreign diversification. This, coupled with government belt-tightening, rising interest rates and low commodity prices, will impede growth.
Against this macroeconomic backdrop, attempts to reignite animal spirits in order to kick-start fixed investment are critically important.
The government’s efforts to repair relations between itself, labour and business are commendable. However, growing evidence that we are not all rowing in the same direction is mind-boggling.
Nxedlana is FNB chief economist