Domestic and global uncertainties weighed on sentiment in the second quarter of 2012, with South Africa’s political climate and a looming European crisis flagged as noteworthy constraints on business.
This is according to the Rand Merchant Bank's and the Bureau of Economic Research’s (RMB/BER) Business Confidence Index (BCI) released on Thursday.
The RMB/BER BCI fell by 11 points to 41 in the second quarter of 2012, following a marked increase in the first quarter.
Efficient Group economist Dawie Roodt told Engineering News Online that the falling exchange rate and deteriorating equity market in South Africa, brought on by international economic uncertainty, also contributed significantly to weakening business confidence.
“It is unclear what will happen in Europe, which leads to severe uncertainty in terms of the future and therefore also affects local business confidence. What is clear, though, is that should the European economy implode, it would be bad for all of us,” Roodt said.
BER senior economist Hugo Pienaar said at the BER conference, in Johannesburg, earlier in the week, that decreasing confidence was resulting in the domestic corporate sector keeping its money in cash, rather than employing it in fixed investments.
He added that the current pressure on the rand could persist in the short term, or until the outcome of the Greek elections was known.
However, Pienaar remained optimistic, stating that the rand could show significant recovery towards the end of 2013, provided the global economy takes an upward turn.
Heightened risk to global growth also resulted in a sharp price fall in key commodities such as oil and copper, which further hindered business confidence.
The RMB/BER BCI showed that the mood during the second quarter soured in four of the five business sectors making up the index.
Retail confidence fell from 61 index points in the first quarter to 39 in the second, the lowest level in two years. RMB and the BER attributed the fall mainly to weaker growth in sales volumes across all types of retailers.
Manufacturing confidence plunged from 47 index points to 29, despite domestic and export sales volumes holding up in the second quarter. Rising inventory levels relative to expected demand, as well as shortened delivery times of orders received underscored the concerns.
New-vehicle-dealer confidence also declined from 73 index points to 65, in large part owing to noticeably slower growth in sales.
Sentiment among building contractors deteriorated from 31 to 24 index points in the second quarter. The decrease stemmed mainly from nonresidential contractors, whose confidence fully reversed its first-quarter gain.
However, wholesale business confidence increased modestly from 48 to 50 index points on the back of improved sales of nonconsumer and consumer goods.
“Given deteriorating prospects for consumer spending, as well as for exports, the pressure is now even more on fixed investment to come to the economy’s rescue. The sharp drop in business confidence does not bode well for prospective private sector fixed investment, in particular, and economic growth in general.
“If ever there was a time for the government to kick capital expenditure into higher gear, it is now,” RMB and BER stated.
Meanwhile, the South African Chamber of Commerce and Industry (Sacci) BCI for May 2012 declined by a further 1.5 index points to 92.8 - its lowest level in more than nine years.
Sacci's BCI was currently 8.4 index points lower than in May 2011, when it registered 101.2.
Sacci stated that the BCI was marred by notable negative movements in the subindices in May. Only two of the thirteen subindices were positive month-on-month, while the financial and real economic components had just one subindex each that showed positive growth.
Over the medium term, the yearly comparison showed that three of the subindices improved in May, this included household spending, government spending and lower real interest rates.
“The contagion from the economic impasse in Europe is gaining in global impact as faster-growing economies are now also experiencing a slowdown while circular and multiplier effects continue to grow,” Sacci stated.
It added that the lack of alignment across economic policy positions was posing a challenge locally, as business sought policy stability in an increasingly perplexing domestic economy.