Business confidence hits 10-year low

Business confidence in South Africa is at its lowest level in 10 years, according to the RMB/BER Business Confidence Index released on Wednesday.

The index declined in the third quarter, falling by three points to 23.

This was the index’s lowest level in 10 years—a reading of 15 was recorded in the second quarter of 1999, just before the start of the last cyclical economic upswing in September of that year.

RMB said the third-quarter decline in business confidence was the net outcome of different results for the individual sub-sectors comprising the overall index.

The biggest decline was seen in the wholesale sector, where confidence fell from a level of 36 in the second quarter to 17 in the third quarter.

“This represents the biggest decline among the various sub-sectors and suggests very poor wholesale trading conditions,” RMB said.

Confidence continued to decline in the retail sector, whereas it increased in manufacturing and new vehicle trade.

In the case of building and construction, the business mood remained largely unchanged.

Based on declines in all retail sub-sectors (except new motor trade), overall retail business confidence dropped from 47 index points in the second quarter to 35 in the third quarter.

“In contrast to what one would expect, the decline in confidence was not brought about by a further worsening in sales and order volumes, but rather by a sharp decline in selling prices, and thus deteriorating profitability,” RMB said.

Manufacturing confidence jumped from a level of 11 index points in the second quarter to 22 in the third quarter.

“Buoyed by an improvement in foreign as well as domestic sales volumes, a bounce from such a heavily depressed level in the second quarter had been on the cards,” RMB said.

It said that admittedly—from still very low levels—business confidence in new vehicle trade improved for the third quarter running, climbing from 12 index points in the second quarter to 19 in the third quarter.

“Rising confidence is consistent with the continuing moderation in the year-on-year rate of contraction in new passenger car sales,” RMB said.

Confidence in the building sector essentially stabilised, increasing marginally from 23 in the second quarter to 24 in the third quarter.

Alternative view
Ettienne le Roux, RMB chief economist, said while it was possible to interpret declining overall business confidence as a sign of worsening economic activity in the third quarter, he supported an alternative view.

“The recession, after having hit its worst point in the first quarter, continued to moderate in the third quarter,” he said.

“Supportive of this notion is the fact that the overall decline in business confidence was marginal, and that confidence actually remained the same or increased in three of the five sub-sectors comprising the aggregate index.”

Moreover, Le Roux said, the decline in retail confidence appeared to reflect shrinking profit margins (as a result of falling selling prices), rather than a further deterioration in sales volumes.

“Indeed, retail sales volumes improved from second-quarter levels,” he said.

Le Roux said that the South African Reserve Bank recently indicated that following a record-breaking 99 months of upswing, the economy entered a cyclical downturn in December 2007.

“The impact of the global financial and economic crisis transformed this cyclical downturn into a 1991/1992 style recession, as reflected by successive declines in real GDP [gross domestic product] output in the three quarters since the last quarter of 2008.”

Le Roux said in this period output shrunk by annualised rates of 1,8%, 6,4% and 3% respectively.

While the ongoing decline of the RMB/BER Business Confidence Index suggested the recession continued in the third quarter (and may even have deepened), such a negative interpretation could be taken too far, Le Roux said.

“A greater portion of sub-sectors show that confidence is either stabilising or rising, while detail from the BER survey results shows an improvement in business volumes, including an upturn in domestic and export sales volumes in the all-important manufacturing sector.”

He said instead of economic conditions deteriorating, these developments pointed to the worst of the recession having passed, with the economy showing signs of recovery, admittedly from still very weak levels.

The third quarter survey was conducted between August 3 and 31 2009.—Sapa

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