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Send  Share  RSS  Twitter  06 Sep 2011

ECONOMY: Business Confidence Drops Back Further

 



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After declining by seven points to 48 in the second quarter, the RMB/BER Business Confidence Index (BCI) fell by a further nine points to 39 in the third quarter of 2011. A reading of 39 indicates that six out of 10 respondents are unsatisfied with prevailing business conditions. Although business confidence is currently at its lowest level in over a year, the number is almost double that registered at the worst point of the recession in 2009.

During the third quarter, business confidence declined in the new vehicle trade, manufacturing and wholesale trade sectors. It remained around the same levels in the building and retail trade sectors.

New vehicle dealer confidence fell from 76 to 58 index points as the momentum in sales volume growth slackened. Whereas lower real growth in the second quarter was mainly the result of special factors (fewer trading days in April due to the many public holidays and a shortage of certain makes and models given disruptions in the manufacturing supply chain after the earthquake in Japan), the subsequent further retreat indicates that more lasting factors (such as the replacement cycle approaching its end and household incomes coming under some strain) are probably at play. Still, despite the third quarter fall in confidence, new car dealers remained the most upbeat of all the sectors surveyed. Close to six out of 10 dealers are still happy with prevailing business conditions.

After eventually rising to the neutral level during the first half of 2011, manufacturing confidence took a knock in the third quarter, slipping from 51 to 36 index points. Temporary factors caused by the disruption of industrial action and loss of production capacity at a major steel plant, as well as other factors including poorer-than-expected domestic sales, affected the mood.

After falling from 65 to 47, wholesaler confidence dropped by a further 16 index points to 31 in the third quarter. This brought confidence to its lowest level since the end of 2009. The deterioration in sentiment can mainly be attributed to weaker sales experienced by wholesalers of building and construction materials.

Whereas the motor trade, manufacturing and wholesale trade sectors all indicated that underlying demand remained weak during the third quarter, the retail trade sector bucked the trend. After a dismal second quarter, sales volumes recovered strongly in the third quarter to levels last seen in the fourth quarter of last year and the first quarter of 2011. Confidence did not increase as one would have expected it to under these circumstances, but remained largely unchanged, moving from 47 to 48. This can mainly be attributed to retailers’ expectations that fourth quarter (Christmas) sales will be muted.

Confidence in the building sector remained frustratingly low, easing from 21 index points in the second quarter to 20 in the third quarter. The decline would have been larger if it had not been for some improvement in the mood of non-residential building contractors. For the industry as a whole, the latest results extend the experience of the past three years in which building confidence fluctuated between 20 and 25. This is the first time since the period from 1976 to 1978 that building confidence has remained so low for such a protracted period.

Bottom line

Two consecutive quarter declines in the RMB/BER BCI do not necessarily indicate the end to the business cycle upswing as confidence does not usually increase in a smooth fashion during an economic upturn. For instance, over the course of the 1999 to 2007 upswing, there were instances in 2000 and in 2002/’03 where sentiment deteriorated for several quarters only to subsequently improve again. Still, the drop in confidence, as well as the weaker underlying developments in all the sectors, except for retail trade, do suggest that the upturn has lost some steam. Following the slowdown from an annualised growth rate of 4.5% in the first quarter to 1.3% in the second quarter, real GDP growth in all likelihood remained weak in the third quarter.

So far the business cycle upswing has mainly been driven by South Africa’s favourable terms of trade and strong real wage gains. In the context of weakening growth in world trade, it is uncertain whether export commodity prices will continue to rise. Also, business confidence survey results have for some time now indicated that strong wage inflation, among other sharp cost increases, are starting to take their toll on employment creation. The upswing will remain fragile until the factors that normally drive durable expansions, such as rising fixed investment, job growth and increased credit spending, kick in.


 
 
 
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