Although the business confidence index has dropped significantly, Sacob believes the longer-term outlook is positive, writes Madeleine Wackernagel
The sharp reversal in the business confidence index for July came as no surprise, says Dr Ben van Rensburg, chief economist of the South African Chamber of Business (Sacob), which compiles the monthly measure.
“Inflation, interest rates and the exchange rate climate were all wrong — and we see little chance of improvement in the short term,” he says.
But, according to Dr Ernie van der Merwe, economics chief at the Reserve Bank, the dent to confidence will not necessarily affect the growth outlook for this year.
“It is normal at this stage in the economic cycle for business indicators to show some diversity. We are reaching the top of the cycle and the indices reflect that,” he says.
At 116,6, the index stands at its lowest since September last year — although this is still higher than a year ago — and marks a reversal of 2,3 percentage points on June’s recovery.
The reasons given for the setback in July include the weaker rand, increased industrial action, uncertainty over interest rates and the medium-term economic outlook, as well as concerns over the effect of increased volatility in world financial markets on the global economy.
But while the signs pointed to continued upheaval in the short term, the longer-term outlook is positive, says Van Rensburg. The key to realising this potential is the successful implementation of the government’s growth strategy. “We have to prove the sceptics wrong.”
The Reserve Bank’s growth projections for this year are still on target, says Van der Merwe, although “we are more inclined towards 3% than the original expectation of a 3,5% increase in gross domestic product (GDP).
“Agriculture and non-gold mining are doing very well, and we are optimistic this trend will continue for the rest of the year. Next year may be a different matter — two good agricultural seasons in a row may be unrealistic.”
In its macro-economic strategy, unveiled two months ago, the government’s model was based on GDP growth of 3,5% this year and 2,9% next, to reach 6% by the year 2000. And while most economists have pencilled in a more realistic 2 to 2,5% for next year, a dip in the growth rate will not derail the government’s plan, says Van der Merwe.
“The likelihood of lower growth in 1997 was taken into consideration, but there is still a very good chance that we’ll get to 6% by 2000. We’re not entering a recession — this is merely a cyclical blip. We are no longer experiencing the boom-and- bust scenarios of previous cycles, so it is only normal that the economy should grow at a slower pace in some years.”
Sacob’s Van Rensburg agrees: “The world economy is enjoying good growth, which will stand us in good stead. It looks now as if the growth baton is being passed from the United States and Japan to Europe, so there is no threat of a sudden downturn.”
Instability on the world’s financial markets is a concern, however. In an ideal world, we could have used an easier monetary policy to underpin the growth rate, says Van Rensburg, as the option of fiscal expansion is closed to us because of our Budget deficit.
Indeed, if not for the latest crisis, the Reserve Bank may have considered lowering interest rates. But the rand is continuing to dictate monetary policy, and its roller-coaster performance seems likely to continue.
“With the rest of the world suffering similar upheavals, South Africa cannot hope to remain immune,” says Van Rensburg.
“The rand is being tested by speculators. Exchange rate movements are not just the product of investor sentiment; with the extent of speculation on world markets and international capital flows, we accidentally get in the way and get bruised. The Reserve Bank must now concentrate on minimising the potential for financial instability,” says Van Rensburg.
“The last thing we need in the middle of implementing the macro-economic strategy is for volatility in the financial markets to jeopardise the whole operation.”
The threat of another rise in interest rates is also damaging confidence. “We must try to avoid an increase at all costs,” says Van Rensburg. “The last hikes did a great deal of damage.”
While the immediate crisis had passed, with the rand pulling back from the brink after reassurances from Reserve Bank governor Chris Stals that he had no intention of resigning, backed by President Nelson Mandela, the markets were still unsettled.
Sacob was due to meet the Reserve Bank chiefs this week and was expected to emphasise the danger of another hike in interest rates. “It should only be contemplated as a last resort,” says Van Rensburg.
In the meantime, the government should push ahead with its macro-economic strategy: “The sooner South Africa can create a credible track record for the implementation of the economic strategy, the better its chances of strengthening investor and business confidence.”