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Business confidence remains low

RMB index warns of a technical recession.

JOHANNESBURG – Business confidence in South Africa remained unchanged at a low 41 index points in the second quarter of 2014, sparking fears that the economy is already in a technical recession.

This is according to the RMB/BER Business Confidence Index (BCI) released on Tuesday, which singles out electricity shortages and labour strife as weighing on business confidence.

The index, which surveys 2 500 companies between May and June, pegs respondents who continue to be unhappy about prevailing business conditions at 60%.

The index has been hovering at the 40 index point level for a year now.

Other factors that impacted business confidence could be the large number of public holidays in April and the national election.

“Although the business mood soured notably among manufacturers, and to a lesser extent among building contractors and wholesalers, confidence of retailers and new vehicle dealers improved, but remained in net negative territory,” the report says.

In particular, manufacturing confidence dipped from 41 to 25 index points, the lowest level since the economic upswing started in 2009. The plunge in confidence, the report says can be attributed to lower sales volumes and profitability.

“While the on-going strike in the platinum sector has adversely affected suppliers of items such as chemicals and machinery, it was not the only drag on manufacturing. Domestic sales in sectors with no link to platinum mines also weakened, while export sales volumes deteriorated as well”.

On the positive side, the retail sector saw improved confidence from 39 to 49 index points in the second quarter. RMB warns that the improvement in retail business conditions must be taken with caution.

The improvement in sentiment happened despite growth in sales volumes remaining muted in the second quarter. “Cost cutting and a concomitant rise in profitability is not a sustainable reason for higher levels of confidence. Ultimately, a more sure reason is top line growth, which for most retailers continues to be lackluster.”

Improvements in confidence also continued for new vehicles dealers, which in the first quarter recorded a plunge in business confidence from 41 to 27 index points. In the period under review business confidence among new vehicle dealers bounced back to 43 index points, despite vehicle sales remaining depressed in the second quarter.

Building confidence declined from 49 to 45 index points, in an environment where banks’ lending criteria for mortgage loans tightened and South Africa’s Reserve Bank warned of a rising interest rate cycle.

RMB expects South Africa’s real gross domestic product to expand by around 1.5% to 2%. “If the services sector, coupled with agriculture and construction more or less maintain their first quarter growth momentum, a return to more normal conditions in the platinum industry would give the economy a kicker in the second half of the year”, the bank notes.

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