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Business sentiment improves in Q2

While confidence, a leading indicator for economic activity, is tracking higher let’s hold thumbs that we don’t go off track because of the risks, muses Ettienne le Roux – chief economist at RMB.

NOMPU SIZIBA: Business confidence in the second quarter ticked up quite substantially. That’s according to a reading by the RMB/BER Business Confidence Index. It showed that confidence jumped 15 notches to 50 index points in the second quarter. The survey looks at five key sectors, namely building, manufacturing, retail, wholesale, and the motor-trade sectors. But with the country now facing a Stage 4 load shedding session, the big question is whether the pickup in sentiment will be sustained.

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Well, to discuss the latest BCI I’m joined in studio by Ettienne le Roux. He’s the chief economist at RMB. Thank you very much for joining us, Ettienne. This is quite a significant jump. So was it pretty much a broad-based thing?

ETTIENNE LE ROUX: Absolutely. Not only at headline level, up 15 points to a level of 50 – which is quite striking to say the least – but also the improvement in sentiment has been broadly based. So we saw quite a strong rebound in three of the five sectors, and double-digit increases in the quarter. So all-round good news for now.

NOMPU SIZIBA: Is this a matter of base effects, simply because this time last year the situation wasn’t great, or are there new factors that are making people more confident about the future?

ETTIENNE LE ROUX: Well, just remember the headline index is based on a question where we asked our respondents to compare prevailing business conditions with the quarter before. So it is the second quarter relative to the first quarter. To see confidence picking up quite nicely is quite encouraging. Of course in the second quarter we had far fewer lockdown restrictions, so that certainly would have helped the mood.

More broadly speaking, I think confidence is picking up for good economic reasons. The economy is doing better. The economy is more open. Companies are churning again. They are rehiring people, salaries are being paid, profits are being made. It’s a function of all of those things coming together, and business people are feeling much better than they did two, three quarters ago. It makes sense. I think it just gels with the economic recovery that we’ve seen since the height of the pandemic in the second quarter of last year.

And then of course the other windfall is fantastic global growth and, going along with that, the spectacular run in dollar commodity prices. Many of our respondents are indirectly benefiting from that.

NOMPU SIZIBA: But, putting a spanner in the good works, is the constant electricity-supply constraints, and today our getting to Stage 4 load shedding is a big deal.

ETTIENNE LE ROUX: It’s definitely a big deal. In our concluding paragraph we speak about risks, uncertainties, stuff that can knock confidence back hard in the next few quarters – and Eskom is certainly one of them. The electricity grid is very unstable, and to go from Stage 2 to Stage 4 is a big deal.

Big companies will cope much better than small companies. And big listed companies, public companies, over the last couple of years have invested a lot in alternative energy sources. But micro companies can hardly afford that. And small and medium-sized companies, put together, matter a big deal. They employ most of the people in the formal sector and so forth.

So I’m afraid to say that if Stage 4 persists, and if we see this problem for an extended period, it’s certainly going to knock confidence and it can certainly harm the economic recovery. This is the last thing that South Africa now needs at a time when the economy is starting to find its legs again.

NOMPU SIZIBA: What about the structural reforms, the reconstruction and economic recovery? Do you see elements of that happening?

ETTIENNE LE ROUX: Well, let’s go back to the survey results. We survey civil construction companies and they typically would derive most of their business from the government and infrastructure-focused [businesses]. I tell you, they have their hands in their hair. We read in the paper of R1 trillion of infrastructure investment over the next three, four years, but our respondents are seeing very little, if anything, of that at this stage. Their confidence levels are still rock-bottom, and we have hardly seen any improvement in confidence for respondents in the civil sector. That must change.

At the end of the day if we have this economic recovery and if you want to turn it into a sustained business-cycle upswing, very simplistically we need jobs. And for jobs you need investment – private and public. The government has a big role to play here. If they can fast-track the infrastructure drive, that will certainly kick the economy up a gear. And if the government implements overdue business-friendly policies and reform that can certainly give business confidence a further [hand] up – if you can then get private and public together in an investment drive.

NOMPU SIZIBA: What about that other elephant in the room, the poor performance of the vast majority of municipalities which need to create a situation for businesses to thrive?

ETTIENNE LE ROUX: Well, that’s also a big deal. Clover is a very good example. They are closing [SA’s biggest cheese factory in the North West]. And there are various other examples of companies that are battling, purely because the municipalities are not delivering the services that they’re supposed to deliver – basic services, infrastructure, water and whatever the case is. No doubt if I were to survey that company, hardly will you see confidence levels up. So, no doubt, electricity, basic services, and municipalities comprise all the stuff that matters for companies, the basic stuff that they need in order to operate, to create jobs and to push the economy forward.

NOMPU SIZIBA: My line of questioning seems to be negative. Can we just end on a positive note?

ETTIENNE LE ROUX: Yes. The positive news is that despite all of these uncertainties and threats that we are talking about here, the fact of the matter is that confidence has improved quite a lot. Remember, at the height of the pandemic our business confidence index was at five points. Now we standing at 50. So it’s very encouraging to see confidence tracking higher and that’s a good leading indicator for economic activity. It suggests that the growth that we saw in the first-quarter GDP number yesterday [heralded] the recovery in the second quarter. Let’s just hold thumbs that we don’t go off track because of some of these other uncertainties that you spoke about, these risks that we spoke about – Eskom being one of them.

NOMPU SIZIBA: Indeed. Ettienne, thank you very much for your time. Ettienne le Roux is chief economist at RMB.

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Ja Ettienne…

Ek weet nie meer met vlak 4 loadshedding nie.

Ek dink die Finansiele aandele gaan seer kry binnekort met Covid-19 sterftes, groot werkloosheid and slegte crediet.

End of comments.

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