Uneasy Business Mood

SACCI today released its Business Confidence Index (BCI) for January 2008 which measured 93,8 after it declined to 94,8 in December 2007. The January 2008 BCI is the lowest level for the BCI since October 2003. The negative business sentiment in January 2008 was in some way contained by record precious metal prices, slightly positive data on retail and vehicle sales and lower real financing costs. All the other sub-indices impacted negatively on business confidence.

In December 2007 the BCI was 8,7 index points lower than in December 2006 and 7,7 points lower in January 2008 than a year earlier. The magnitude of the drop in business confidence during the course of 2007 becomes clear when taking into account that the BCI was only 1,6 index points down year-on-year in January 2007 but 7,7 points lower in January 2008. All the other sub-indices impacted negatively on business confidence.

The SACCI BCI is monitoring indicators that have been judged by business to have the greatest bearing on the business mood and may therefore not immediately reflect on structural economic deficiencies such as the breakdown in electricity supply. The defects (notably the electricity shortages of late) are of such a severe, sensitive and strategic nature that the magnitude in terms of real physical economic performance and capacity constraints has not yet fully entered the information base that shapes the business opinion and mindset.

It is apparent that the shortage of electricity does pose a severe threat to the production capacity for goods and services, since critical production time is lost due to electricity power shortages during working hours. Even if the loss in output could be limited to 5% to 10% of GDP, it will be difficult to attain any growth in the economy in 2008.

The severity of the electricity crisis has shifted all the attention towards keeping the economy functioning ‘normally’ (supply side). The weaker rand against important trade and investment related currencies bears testimony to a troubled business mood. However, the effect of the weaker rand on inflation (which now seems to be a secondary problem), could put monetary policy back on the defensive against rising price instability.

SACCI’s January 2008 BCI probably does not carry the full effect of the breakdown in electricity supply on business confidence. Private sector participation and privatisation, as already envisaged at SACOB’s 1999 Annual Convention, could provide important solutions to the dilemma. Actions speak louder than words and business and investors will be sensitive on how the dilemma is handled in the short-term and for possible solutions to address the dilemma in the long-term. In the meantime, business confidence will remain under pressure.