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ECONOMY: Business Confidence Deteriorates Further

 



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The RMB/BER Business Confidence Index continued to decline in the third quarter, falling by 3 points to 23. This is 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.

The third quarter decline in business confidence is the net outcome of divergent results for the individual sub-sectors comprising the overall index. Confidence continued to decline in the retail and wholesale trade sectors, whereas it increased in manufacturing and new vehicle trade. In the case of building and construction, the business mood remained largely unchanged.

Sector detail:

  • In the wholesale sector 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.

  • 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.

  • 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.

  • 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.

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

It is possible to interpret declining overall business confidence as a sign of worsening economic activity in the third quarter. “An alternative view, and the one we support,” said Ettienne le Roux, RMB Chief Economist, “is that the recession, after having hit its worst point in the first quarter, continued to moderate in the third quarter.” 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, the decline in retail confidence appears 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.

Bottom line

On Thursday last week the Reserve Bank 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 output in the three quarters since the last quarter of 2008. Over 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 suggests that the recession continued in the third quarter (and may even have deepened), such a negative interpretation can be taken too far. 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. Instead of economic conditions deteriorating, these developments point 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 3 and 31 August 2009.


 
 
 
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