Local business becoming more confident

Kevin Lings, chief economist at STANLIB.

South African companies are poised to invest locally as soon as consumer demand shows signs of picking up. This is a marked change from last year, when they showed a preference for foreign diversification.

After the shocking 2.2% decline in first quarter GDP growth, subsequent economic data has improved, in particular for the retail and manufacturing sectors. But none of it suggests this economy is especially buoyant. While we may avoid a technical recession if GDP growth in the second quarter is positive, it will be a small positive.

Apart from deciding to hold interest rates unchanged at its latest Monetary Policy Committee meeting, the SA Reserve Bank revised down the GDP forecast this year to 1.2% from 1.7%. In economic terms, that is a very significant revision. It tells us the bank has not seen much in the way of growth initiatives.

The obvious question is why the bank does not cut interest rates to stimulate the economy. But the bank is also watching international risks relating to trade wars and emerging market flows, which may affect inflation. So it has little room to cut rates at this stage.

From our equity team’s recent meetings with companies across a wide range of sectors, from retail to manufacturing and services, it has become obvious the economy has flatlined across the board in the last six months. Companies highlighted the slowdown in government and state-owned entity spending in recent months compared with previous years, as well as weak consumer confidence.

But business sentiment has turned. Last year businesses were pessimistic about prospects for local growth. This year their confidence has improved markedly. They are willing to invest, as soon as the demand side of the economy shows signs of reviving.

Government can stimulate consumer confidence by providing greater political stability and integrity and more policy certainty.
With current global uncertainty, there is less appetite to seek business opportunities elsewhere. It is easier to invest locally than offshore and the lead times are faster.
These signals make us cautiously optimistic that the conditions are emerging for more positive growth in the SA economy in the medium term.

Please click on the link to listen to the podcast
https://soundcloud.com/user-593164729/kevin-lings-and-herman-van-velze-chat-about-local-business-becoming-more-confident/s-1JgZS