Cape Town - Business confidence in South Africa has reached a level of despondency last seen during the 2009 recession, according to the latest RMB/BER Business Confidence Index (BCI) released on Wednesday.
Seven out of every 10 respondents were downbeat about prevailing business conditions. According to the index report, the sharp deterioration in sentiment reflects more than just the impact of increased political uncertainty.
The index report explains that, according to the SA Reserve Bank’s dating chronology, the current business cycle downswing is already 43 months in progress. This makes it the second longest one in South Africa’s history, only surpassed by the 1989 to 1993 downturn.
"For the RMB/BER BCI to have fallen in the way it has, so late in the current downturn, is concerning to say the least," warns the report.
"While the Cabinet reshuffle and consequent sovereign credit rating downgrades undoubtedly played a role, confidence was also knocked hard by persistently weak business activity."
The index dropped by 11 points to 29 in the second quarter after having hovered in net negative between 32 and 42 index points over the past year.
No regular occurence
Each of the five sectors covered in the survey - manufacturing, retail trade, wholesale trade, motor trade and the building sector - now has a BCI below 50. The report points out that this is not a regular occurrence. Over the past 42 years it occurred only in 12 instances, the last of which was during the global financial crisis when it correctly signalled the onset of a cyclical domestic economic downturn.
"The fear is that the broad based drop in confidence this time around is a precursor to the current business cycle downswing becoming even more pronounced in the period ahead," cautions the report.
"In the case of the manufacturing and the motor trade, operating conditions actually worsened noticeably further in the second quarter. What’s more, many of the respondents are no longer as upbeat as they once were about conditions improving in the future."
Of all the sectors surveyed, the motor trade registered the largest drop, with confidence falling by 19 points to 11 in the second quarter. Nine out of every 10 respondents, therefore, view prevailing business conditions as unsatisfactory.
Manufacturing confidence recorded the second biggest decline, plunging by 12 points to 16.
"Export sales volumes did not deteriorate that much, but domestic sales volumes tanked. The latter corroborates with an ever-growing number of respondents rating present levels of production below capacity," explains the report.
The building sector confidence slipped from 42 points in the first quarter to 36. It was dragged lower particularly by a further sharp deterioration in business conditions for non-residential building contractors, according to the report.
Retail confidence dropped by 10 index points to 35, while sentiment among wholesalers deteriorated by seven points to 49. Significant weakness in consumer spending was the central theme, pulling sentiment further down across both sectors.
In the first quarter, real gross domestic product (GDP) grew by just 0.6% compared to a year ago.
"Given the BCI results in hand, year-on-year growth in all likelihood slowed even further in the second quarter. In fact, given the severe strain many industry respondents - and consumers for that matter - are under, a contraction in GDP for the year as a whole is not inconceivable," states the report.
"During the 2009 recession, authorities could at least sharply ease fiscal policy and aggressively cut interest rates to counter the fall in economic growth related to the global financial crisis. This time around, given sovereign credit rating pressures, providing fiscal stimulus is not an option."
The report states that, while it is not impossible for the SARB to lower rates, a deep-cutting cycle is most unlikely given the rand's vulnerability to various global as well as domestic risks and there are no easy options anymore to kick the economy into gear.
"Given these policy constraints, an end to the domestic political turmoil, the emergence of confidence-inspiring political leadership and the restoration of a mutually-trusting relationship between the private sector and government would go a long way in lifting the business mood - and eventually private sector fixed investment," according to the report.
"Achieving these objectives would be a good start to help reinvigorate economic growth and job creation and thereby deliver the tax revenues needed to finance social spending and poverty relief."
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