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Real business confidence or mass euphoria

16 January 2007 Gareth Stokes

Its midway through January 2007 and the South African Chamber of Business (SACOB) recently released its December 2006 Business Confidence Index (BCI) number. The verdict, if we ignore all the 'smoke and mirrors' usually associated with statistics, is extremely positive.

In fact, the BCI for December 2006 is at its highest level since SACOB first compiled the rating in January 1985.

The BCI is often mentioned during television news broadcasts, and regularly appears in articles on online financial news services. Strangely though, we never get to hear how the index is calculated. Is this index a genuine and respectable business indicator; or is it merely a summary of the views and opinions of a handful of business leaders?

How SACOB measure business confidence

The BCI is derived from thirteen 'Business mood indicators'. Each of these indicators affects the overall index based on whether it has increased (improved) or decreased (weakened) since the previous calculation. These business indicators comprise:

1.Liquidations (liquidations of companies and closed corporations)
2.Manufacturing (volume of manufacturing production)
3.Exports (merchandise export volumes)
4.Imports (merchandise import volumes)
5.Vehicle sales
6.Retail sales (retail sales volumes)
7.Construction (value of private sector building plans passed)
8.Inflation (core consumer inflation for metropolitan and urban areas)
9.Share prices (All-share price index of the JSE Limited)
10.Private sector borrowing (Rate of change in real credit extension to the private sector)
11.Real financing costs (The real predominant overdraft rate)
12.Precious metal prices (average weighted US dollar price of gold and platinum)
13.Rand exchange rate (the average weighted rate against our three main trading currencies the US dollar, GB pound and Euro)
*Source SACOB (www.sacob.co.za)

The index has nothing to do with the expectations and feelings of individual businessmen; but is rather an indication of what the economy is experiencing over a period of time

What it means to us

Higher business confidence is good for business, regardless of the industry concerned. At FAnews Online we are concerned with how business confidence will impact on the various industries we regularly comment on. Here's a quick look at some of those areas.

Insurance (short-term and life): The life insurance industry had taken a knock in the last couple of years. Difficulties relate more to rulings made by various adjudicators and ombudsman against the industry, than to the prevailing business environment. The coming year should see the long-term insurance industry consolidate on the slow improvements made in the second half of 2006. Short-term insurance will always benefit from improved business conditions- so a high index level on the BCI should convert to improved short-term insurance sales.

Tax: Trevor Manuel has been riding a wave of business confidence in the last few years. He's had plenty of opportunity to use the country's improved business performance and combine this with more efficient revenue collection procedures, to hand welcome tax relief to low income earners. There are those who hope he will pass more benefits to small and medium businesses in years to come and we're all holding thumbs he starts this year.

Investment (including retirement): A buoyant business environment should be good for most investment classes. South African investors have been enjoying a strong performance in equities over the last five years- and market corrections aside- it looks like 2007 will bring more of the same.

More than objective engineering

I hope this newsletter leaves you with a good idea of how SACOB's BCI is measured. When you next encounter the number you'll know it is not simply the result of a poll of company executives. Instead, South Africa's Business Confidence Indicator is a genuine estimate of conditions in the business environment.

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