BER Business Confidence collapses to worst level since 2009
By Helmo Preuss
The Bureau for Economic Research’s (BER) / Rand Merchant Bank (RMB) Business Confidence Index collapsed to 29 in the second quarter from 40 in the first quarter. That meant that seven out of every 10 respondents are despondent about prevailing business conditions. The last time we saw such despondency was during the 2009 recession.
The BER said it was striking that each of the five sectors covered in the survey (i.e. manufacturing, retail trade, wholesale trade, motor trade and the building sector) now has a BCI below 50. In the past 42 years, having all five sectors below 50 only took place in 12 instances
According to the authors, the sharp deterioration in sentiment reflected more than just the impact of increased political uncertainty. While the cabinet reshuffle and consequent sovereign credit rating downgrades undoubtedly played a role, confidence was also knocked hard by persistently weak business activity. In the case of the manufacturing and the motor trade, operating conditions actually worsened noticeably further in the second quarter. What’s more, many of the respondents are no longer as upbeat as they once were about conditions improving in the future as there had been a recovery in 2016 as the rand strengthened and economic policy making stabilised under former Finance Minister Pravin Gordhan, who was seen as having steady hands.
The motor trade registered the largest drop amongst the five sectors, with confidence dropping to only 11 (nine out of ten dealer principals are downbeat) in the second quarter from 30 in the first quarter.
Manufacturing confidence recorded the second biggest decline, plunging by to 16 from 28. Export sales volumes did not deteriorate that much, but domestic sales volumes fell sharply. The latter corroborates with an ever-growing number of respondents rating present levels of production below capacity. Statistics South Africa reported that capacity utilisation among large manufacturers fell to 80.8% in February 2017 from 81.8% in February 2016. This is well below the levels above 85% that prevailed when economist Thabo Mbeki was President.
Building sector confidence slipped from to 36 in the second quarter from 42 in the first quarter due to a further sharp deterioration in business conditions for non-residential building contractors, who are reliant on developers willing to invest in shopping malls and factories.
Retail confidence dropped by 10 index points to 35, while sentiment among wholesalers deteriorated by seven points to 49. Significant weakness in consumer spending was the central theme pulling sentiment further down across both sectors.
The authors were very concerned that the deterioration in business confidence was taking place when the economy was already in a downward phase. According to the South African Reserve Bank’s business cycle dating methodology, the current business cycle downswing is already 43 months in progress. This makes it the second longest one in South Africa’s history, only surpassed by the 1989 to 1993 downturn when there was so much uncertainty about the political transition.
During the 2009 recession, authorities could at least sharply ease fiscal policy and aggressively cut interest rates to counter the fall in economic growth related to the global financial crisis. This time around, given sovereign credit rating pressures, providing fiscal stimulus is not an option. And while it is not impossible for the South Africa Reserve Bank to lower rates, a deep-cutting cycle is most unlikely given the rand’s vulnerability to various global as well as domestic risks. There are clearly no easy options anymore to kick the economy into gear in their view.
The authors believe that given these policy constraints, an end to the domestic political turmoil, the emergence of confidence-inspiring political leadership and the restoration of a mutually-trusting relationship between the private sector and government would go a long way in lifting the business mood (and eventually so private sector fixed investment). Achieving these objectives would be a good start to help reinvigorating economic growth and job creation and thereby deliver the tax revenues needed to finance social spending and poverty relief.