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THE ECONOMY: Confidence Remains Resilient

 



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The RMB/BER Business Confidence Index declined by one index point during the second quarter to a level of 26 from 27 during the first quarter. The second quarter survey was conducted between 4 May and 2 June 2009..  As was the case during the first quarter, the decline in business confidence levels is surprisingly small in view of the poor actual business conditions.  This points to perceptions that the economy is approaching the lower turning point of the present cycle. Confidence declined in the building & construction sector (-10), the manufacturing sector (-5) and the retail sector (-5); it recovered somewhat in the both the wholesale (+5) and motor trade (+7) sectors.


Since the end of last year, the local business environment has been overshadowed by the impact on South Africa of the global financial and economic crisis.  The impact of the global crisis arrived on top of an already moderating local business cycle since the end of 2007.  Mining and manufacturing real GDP contracted at real annualised rates of 30% and 20% respectively during the fist quarter of 2009, while the tertiary sector, excluding government (i.e. retail, wholesale & accommodation, transport, financial & personal services), slowed to year-on-year growth of only 0.6% from 5-6% at the end of 2007.  Following on a real GDP growth momentum of 4-5% at the beginning of last year, actual GDP began contracting during the final quarter of 2008 (-1.8% annualised) and this decline intensified during the first quarter of this year (6.4% annualised).  The economy is therefore in its first recession since 1998, with the quarterly declines in GDP much deeper than at that time.  


The SARB has responded quite aggressively, cutting its repo rate at five meetings since December 2008 by a cumulative 450 basis points; in February the Minister of Finance also announced an expansionary budget for the 2009/10 fiscal year.  The global economic situation also stabilised from March this year, and equity and commodity markets have recovered, though much uncertainty remains.


Business confidence has declined from a level of 83 index points at the end of 2007 to 26 in the latest survey.  It is important to note that the local economic downturn was already well established when the sharp contraction in global economic activity and the associated financial volatility hit during the third quarter of 2008 – business confidence declined by 11 index points in that quarter and a surprisingly small 8 index points subsequently.  The relatively insignificant impact on business confidence following the global economic crisis thus far reflects a domestic resilience, and the fact that we did not suffer a banking crisis, unlike many developed economies.


A heartening aspect of the latest survey result is the resilience in the retail and wholesale sectors, where business confidence (47 and 36 index points respectively) is well above that in the other sectors surveyed, which suggests pockets of strength on the demand side of the economy. In particular, non-durable goods and semi-durable goods retailers report comparatively better business conditions.  However, it is worrying that even in these sectors the underlying business volume indicators paint a darker picture compared to what confidence levels suggest.  Furthermore, the dire retailing conditions in the durable goods and motor vehicle trade sectors persisted or worsened further.


The manufacturing sector has also been hit hard – business confidence collapsed from an already low 30 index points in the third quarter of last year to 11 in the latest reading.  This reading equals that at the trough of the 1997-99 business cycle downswing; however, the business volume indicators reflect the worst recessionary conditions in the sector since at least the mid-1970s.


Building contractors’ confidence made a big downward adjustment in the second quarter (from 68 to 47) and a further sharp downward adjustment during the first half of 2009 (another 24 index points to a level of 23).  This deterioration points to weaker fixed investment spending in the broader economy.


Bottom line


While confidence levels and the underlying business volume indicators do not yet signal a lower turning point for the South African business cycle, the earlier sharp declines in business confidence are clearly tapering off. The likelihood is that the real economy contracted further during the second quarter, but not as sharply as during the first quarter.  Though retail conditions are at risk from weaker employment, demand will be supported by lower inflation and monetary and fiscal stimulus.  There are growing signs of recovery in the global economy, which will go a long way to improving the dire manufacturing conditions.  However given the lags involved, the short-term outlook remains challenging.


 
 
 
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