POLITICS

Business confidence under pressure - SACCI

Chamber notes that nationalisation debate is gaining alarming momentum (August 10)

The BCI deteriorated to 99.0 in July 2011 with 2010, the reference year, being 100.  Following the rebasing of the BCI, strong economic performance was associated with levels in the region of 120 index points, experienced in 2005 and 2006.

The SACCI Business Confidence Index (BCI) decreased from 102.4 in June 2011 to 99.0 in July 2011 - the lowest level thus far for 2011.  This is the first time since February 2010 that the year-on-year BCI is negative albeit by only 0.4 index point.  The month-on-month decline of 3.4 in the BCI is the largest since October 2009.

Six of the thirteen sub-indices improved between June and July 2011 and seven were either negative or neutral to the BCI in July 2011.  The year-on-year (y/y) changes in the BCI indicate that the present upswing may be faltering with important sectors remaining tentative.  Five of the real economic sub-indices are performing weaker than a year ago and it is mainly the financial circumstances that are still better than in the previous year. 

From July 2011, a new sub-index on utility services has been introduced to the BCI - replacing the sub-index on liquidations.  This sub-index was positive on a month-on-month basis but had a negative impact on a year-on-year basis in July 2011.     

Public debt issues dominated economic and financial developments in the world during the month of July.  Both the crises in Greece and the USA have been defused but not resolved.  The problem of excessive public spending, however, remains with many economies and has to be rectified to ensure fiscal and economic sustainability in the long-term.

Domestically, the "strike season" is putting further pressure on an already embattled economy.  Wage demands in excess of prevailing inflation levels, impact on the ability of businesses to create employment thereby contributing to poverty reduction.  SACCI is concerned that under these fragile economic conditions, unemployed and discouraged work-seekers have risen to 38.2% of the labour force in the 2nd quarter of 2011. 

With the global economy broadly characterised by stagnation,  business confidence will continue to be a casualty with the consequence that positive employment prospects are further deferred.

For a full background to this month's SACCI BCI see below.

SOUTH AFRICAN CHAMBER OF COMMERCE AND INDUSTRY

Business Confidence Index July 2011

THE SACCI BUSINESS CONFIDENCE INDEX 2010=100

THIS MONTH'S BCI RESULTS

By taking the average for 2010 as the reference point, the SACCI Business Confidence Index (BCI) decreased from 102.4 in June 2011 to 99.0 in July 2011 - the lowest level thus far for 2011 following the previous low of 101.2 in May. With 2005 as the reference year and equal to 100, the BCI stood at 84.0 in July 2011 compared to 86.8 in June 2011.

This is the first time since February 2010 that the year-on-year BCI is negative albeit by only 0.4 index points. The month-on-month decline in the BCI is the largest since October 2009. The average of the BCI for the first seven months of 2011 is still 4.1 index points higher than the average of the BCI for the first seven months of 2010. Notwithstanding the improved average level in 2011 as compared to 2010, business confidence has continued its downward trend since the start of 2011.

In comparison to June 2011, when seven sub-indices positively affected the BCI, six of the thirteen sub-indices improved between June and July 2011 and seven were either negative or neutral in July 2011. From July 2011, a new sub-index on utility services was added to the BCI - replacing the sub-index on liquidations. This sub-index was positive on a m/m basis but made a negative impact on a y/y basis in July 2011. This addition to the BCI was made on the basis of the increasing impact that municipal service delivery is having on the local operations of enterprises and the impact that such delivery would consequently have on confidence in the business environment.

The year-on-year (y/y) changes in the BCI indicate that the present upswing is faltering with important sectors remaining reticent. Five of the real economic sub-indices are weaker than a year ago although the financial sub-indices are faring better than in the previous year.

ECONOMIC COMMENTARY

Fragile Economic Circumstances

Public debt issues dominated economic and financial developments globally in the month of July. Although many countries are battling with fiscal overhangs, the servicing of public debt came to the fore in Greece and the USA. In both cases, the crises were defused but not resolved. In the final analysis, the reigning in of public sector expenditure lies at the core of the problems and needs to be addressed by structural reform measures rather than through temporary lifelines and financial shuffling.

In Southern Africa, Swaziland has also been experiencing fiscal shortfalls and had to revert to conditional financing from South Africa to the amount of R2.4 billion to keep its public sector operating. The problem of excessive public spending remains with many economies and has to be remedied to ensure fiscal and economic sustainability in the long-term.

Economic performance in the USA was weak during the first half of 2011. It appears that growth in China and India is slowing as well while growth in Europe is weakening from already unconvincing rates. Japan is expecting growth to recover in the rest of 2011 following the setback experienced from the earthquakes in March 2011. Domestically, "strike season" is putting further pressure on an already embattled economy. Wage demands in excess of prevailing inflation levels, impact on the ability of businesses to create employment thereby contributing to poverty reduction.

SACCI also notes that the nationalisation debate is gaining alarming momentum. Support that COSATU has recently shown for nationalisation dampens foreign investor enthusiasm for South Africa at a time when the worsening political crises and financial woes of EU states are likely to inhibit economic growth in advanced and developing economies. Both domestic as well as international investors are experiencing conflicting messages about South Africa's commitment to doing business

These combined impacts on the South African economy are likely to result in slower economic growth and an inability for business to contribute effectively to the national goals of job creation and poverty alleviation. Under fragile economic conditions, unemployment and discouraged work-seekers rose to 38.2% of the labour force in the 2nd quarter of 2011 compared to 36.3% in the 2nd quarter 2010 with four hundred and six thousand more unemployed persons.

Trade Account Improves

The prospects for improved economic growth are becoming more dubious as is evident from a range of indicators released for the 2nd quarter of 2011. Year-on-year (y/y) growth already showed weakness in the 1st quarter of 2011 by measuring 3.6% - down from 3.8% in the 4th quarter of 2010. The improved export volumes are more commodity-driven and do not imply benefits for the broader economy. The cumulative trade account deficit for the first half of 2011 was R2.6 billion compared to R8.7 billion in the first half of 2010.

Hesitant Manufacturing and Mining Output

Mining output in May 2011 was 10.2% below the average level of output in 2005. Only five of the twelve minerals listed were at higher output levels in May 2011 than in 2005. Given this uncertain situation, the debate on nationalisation of mines will have detrimental repercussions for output and foreign direct investment in this sector. The supply of electricity is another constraining factor to mining output and the downstream processing of minerals.

Manufacturing output is facing difficult times with total output only 2.5% higher in May 2011 than in 2005. Some sub-sectors of manufacturing are producing well below the 2005 levels - see table below. It is quite clear that with agricultural output reasonably stable despite the threat to land ownership, mining output well below potential, and manufacturing output barely above 2005 levels, employment creation and investment will remain inhibited. Any adverse exogenous effects on these output levels could tip the scale of economic growth in the wrong direction. The tertiary sector would not be able to carry the burden of employment and growth and should be in synergy with, and needs the support of, vibrant primary and secondary sectors.

Conclusion

Global and domestic economic conditions are not conducive to improved business confidence. Serious fiscal instability in advanced economies and even in some emerging and developing economies, as well as lacklustre investment performance, pose the threat of another economic slowdown barely 23 months into the upward phase of the business cycle. The global economy might even be heading for "The Great Stagnation"1 in which business confidence would be a casualty.

1 The Great Stagnation, Tyler Cowen. George Mason University. 2011.  

Statement issued by Mr. Richard Downing, SACCI Economist and Mr. Neren Rau, SACCI CEO, August 10 2011

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