After falling from 18 to an all-time low of five in the second quarter, the Rand Merchant Bank (RMB)/Bureau for Economic Research (BER) business confidence index (BCI) rebounded to 24 in the third quarter.
Assurance, advisory and tax services firm PwC says the latest BCI remains among the worst readings since the turn of the millennium. During the global financial crisis of 2008/9, for example, the lowest reading was 25 (in the third quarter of 2009).
However, the BER states that, from such a low base, when the strictest of the Alert Level lockdowns took effect, this improvement is not entirely unexpected. But, even so, the BER states that, while the outcome is pleasing, sentiment remains heavily depressed, with almost eight out of every ten business executives surveyed regarding prevailing business conditions as unsatisfactory.
This sentiment is shared by PwC, which states that the still-negative overall BCI reading for the third quarter is not surprising. Available economic data for the third quarter are less negative compared with the second quarter, but “still very bleak”.
As such, PwC points out that the IHS Markit South Africa Purchasing Managers Index showed a smaller decline in private sector activity during July and August compared with the April to June period.
Further, PwC highlights that new-vehicle sales declined by a mean of 28% in July and August compared with an average drop of 65.7% during the second quarter.
The weak state of the economy resulted in a decline of 14.8% year-on-year in government revenue during July. By early September, workplace activity was still 28% lower compared to the start of the year.
The third-quarter survey was conducted online between August12 and 31 and gathered input from about 1 800 executives, spread across the building, manufacturing and domestic trade sectors.
The fieldwork for the third quarter survey covered the period immediately following the announcement by President Cyril Ramaphosa of moving the country to the less restrictive Alert Level 2 on August 17. It was also completed before the renewed onset of widespread load-shedding.
As such, PwC suggests that business sentiment could well have deteriorated in September as power outages adversely affected the economy. The firm estimates that the negative impact of load-shedding thisyear will completely cancel out the positive impact created by interest rate cuts and payments under the Temporary Employer/Employee Relief Scheme (TERS). “With this in mind, our baseline scenario is for the South African economy to contract by an average of 10.4% during the 2020 calendar year,” states PwC.
Of the five sectors making up the composite RMB/BER BCI, the rebound in wholesale confidence by 29 points to 33 in the third quarter was the largest. A vibrant agricultural sector (that boosted certain consumer goods sales) and a further recovery in international trade are two key factors that drove the increase in wholesale confidence.
The index finds that after falling to 11 in the second quarter, retail sentiment improved by a sizeable 25 points to 36. PwC says retail sentiment was lifted by expectations of improved sales towards year-end and continued cost-cutting.
However, the BER notes that this improvement was only partially driven by increased sales volumes. Other factors that helped to lift confidence were expectations of better times ahead, further progress made in reducing costs (particularly through slashing inventories) and an uptick in turnovers (owing to somewhat stronger sales volumes and widespread but small selling price increases).
Manufacturing confidence rebounded to 22 in the third quarter, up from six in the second quarter and 17 in the first quarter. Despite this improvement, weak demand, supply chain disruptions and intermittent temporary factory closures due to positive Covid-19 cases all continued to put a damper on the growth in domestic sales and production.
PwC points out that the latest Absa Purchasing Managers’ Index report found that, after recovering in May and June, factory production recovery stalled before finding some more momentum in August. However, the firm also says that, while this has taken production levels back to pre-Covid-19 levels in some sectors, overall activity remained below pre-pandmic levels.
Motor dealer confidence jumped from a mere two points to 16, taking the index back to the same low level of the first quarter. Although new-vehicle sales recovered somewhat, they remained disappointingly weak. Having fallen from 15 to just two in the second quarter, building confidence recovered to 14 in the third quarter.
Further, the index finds that other than increased spending on maintenance and work-from-home related renovations and improvements, projects for building contractors and subcontractors in the residential property market remained limited.
Equally, activity in the nonresidential property market showed little improvement – an outcome that is understandable given, for example, the high and rising vacancy rates in office space, according to the BER.
In terms of the bottom line, the RMB/BER BCI points out that figures released by Statistics South Africa on September 8 indicate that real gross domestic product (GDP) contracted by an annualised 51% in the second quarter.
RMB chief economist Ettienne Le Roux says that, while no doubt discouraging, the improved RMB/BER BCI in the third quarter is supportive of these figures representing the worst point for this cycle.
Further corroborating this notion is the global economy that is healing, export volumes that are growing again, overall domestic activity that is on the mend and consumer confidence which, similarly to the BCI, inched higher in the third quarter.
The BER states that although a lot of data is still outstanding, these developments point to a much-improved outcome where GDP can recover some lost ground, possibly increasing by an yearly rate of 20% to 25% in the third quarter. Although this is an encouraging outcome, it is also one that would still leave South Africa’s GDP considerably smaller than it was last year, according to the BER.
The government in conjunction with the private sector have much work to do to rebuild an economy that just suffered a devastating blow from the Covid-19-induced global, as well as local shocks.