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Business confidence up marginally in the third quarter

13 September 2017RMB

After plunging from 40 to 29 in the second quarter, the RMB/BER Business Confidence Index (BCI) rose by six points to a still low 35 in the third quarter. Almost seven out of ten respondents therefore remained unsatisfied with business conditions – a troubling outcome to say the least.

Figure 1: RMB/BER Business Confidence

Source: BER, SARB (Shaded areas represent economic downswings)

The fieldwork of the third quarter survey was done during the last two weeks of August, with more than 1600 senior executives surveyed across the building, manufacturing, retail, wholesale and motor trade sectors.

Highlights

Following a collapse in the second quarter, at least business activity in general did not deteriorate further. Also, no major new unsettling political events occurred during the survey period (unlike in March and April, for example, when the cabinet was reshuffled, and related to that, the sovereign’s credit rating was further downgraded). The fact that the RMB/BER BCI recovered moderately during the third quarter is therefore not entirely unsurprising. Still, at 35 it remained disappointingly low. Moreover, although confidence did increase in four of the five sectors making up the BCI, not a single sector has a reading above the neutral-50 mark. Pessimism thus remained relatively widespread in the third quarter.

From heavily depressed levels in the second quarter, sentiment improved both in the manufacturing and the motor trade. Aided by an increase in production volumes, confidence among manufacturers rebounded from 16 to a still low 27. Similarly, new vehicle dealers’ confidence bounced back, rising from 11 to 19 in the third quarter as sales volumes accelerated somewhat.

Consistent with mediocre growth in trade volumes, retail as well as wholesaler confidence remained virtually unchanged. In the case of retailers, the BCI edged up marginally from 35 to 38, which is still relatively far off the 45 in the first quarter. Wholesale is the only sector where confidence declined; it did so by just one index point to 48. In the beginning of the year the index was 56.

Building confidence rose from 36 to 44. Still in net negative terrain, the index is now back at the levels that prevailed throughout most of the past 18 months. Given a challenging operating environment characterised by ample supply of most types of non-residential buildings, continued hesitancy among banks to ease credit standards for extending mortgage loans, and the government’s capex budgets being under pressure, we doubt confidence in the construction sector will increase much further in the period ahead.

Bottom line

While the small increase in the third quarter RMB/BER BCI is encouraging, the improvement must be seen in the broader context of continued weak domestic demand, subdued business activity, low profitability (for most respondents) and heightened political uncertainty. This is not the environment in which the economy is about to experience a resurgence. In fact, the more likely scenario is one where GDP growth remains stuck at around 1% over the short to medium term, hamstrung by lacklustre private sector fixed investment and jobs growth.

While falling inflation, and related to that lower interest rates, will provide some temporary impetus, clear determination as well as action from policy makers to implement appropriate structural reform is the only durable way through which South Africa will be able to turn its growth fortunes around. In this regard, concrete moves towards effectively governed SOEs, skills advancement and quality education, improved immigration policies and less red tape, to name but a few measures, would be a good start. Tinkering around the policy edges is no longer an option.

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