SA’s business confidence has picked up sharply in this quarter (July-September) but the sentiment remains in pessimistic terrain.
This means that fixed investment spending by the private sector will be poor. Such spending is not as significant a contributor to economic growth as household spending, for instance, but it is important, and it would have helped growth had it been higher.
Political risks, further weakness in the rand and a possible ratings downgrade all threaten confidence levels and could fast reverse this quarter’s gains in confidence.
The business confidence index (BCI) of the Rand Merchant Bank/Bureau for Economic Research increased a strong 10 points to 42 in the third quarter, breaking a seven-quarter spell of declines. But the fact that the index remains under 50 indicates that fixed investment spending and job creation by private businesses will continue to be low. The last time the BCI was above 50 was in the fourth quarter of 2014.
"Growth in real private-sector fixed investment [since the fourth quarter of 2014] has been weak and at stages even negative," says RMB chief economist Ettienne le Roux.
The current confidence rose mainly on the back of the successful and generally peaceful local government election in August, a firmer rand, a lower petrol price and stable interest rates over the period.
The 2 900 senior executives in the building, manufacturing, retail, wholesale and motor trade sectors who participated in the survey were polled before the Hawks began to pursue finance minister Pravin Gordhan for questioning over a covert unit established at the SA Revenue Services when he was commissioner, and the rand depreciation following this. Confidence may actually have been shown to have increased only marginally, or even declined, had the survey been conducted after these developments.
The rise in the BCI is fragile and not rooted in solid ground, Le Roux says, adding that any international or domestic shock could diminish business confidence again.
Le Roux identifies local politics as by far the biggest risk to confidence. "A repeat of Nenegate, or something similar, particularly at a time when the economy is already flat on its back, will be a devastating blow to business confidence," he says.
Business Unity SA CEO Khanyisile Kweyama says there is "a general sense of caution" given uncertainties in the political economy, which is not good for business sentiment, as it inhibits growth and investment.
A more pro-growth policy and regulatory environment, and a greater degree of certainty in key areas of concern, would boost confidence, says Kweyama. "To use one obvious example, the fact that an updated Integrated Resource Plan is more than four years out of date, with all the consequences this has for the energy sector and wider economy ... hampers business confidence.
"Greater levels of trust between the private sector and government would be helpful, as would greater levels of trust between labour and business."
Le Roux says global risks to confidence include shocks to Chinese economic growth and uncertainty around the next interest-rate hike in the US. A rate increase in the US would lead to capital outflows from, and currency weakness in, emerging markets.
A jump in confidence as big as the one SA has just recorded has historically pointed to the start of a business cycle upswing. But not this time.
Le Roux says that though the rise in the BCI was widespread, the improvement in underlying business indicators was not. He adds that in sectors where conditions improved, the rebound was not sufficiently robust for one to conclude confidently that SA is witnessing the start of a cyclical upturn.
SA’s poor growth outlook has helped weaken confidence and limited private-sector investment spending.
In the short term, economic growth would be supported by existing programmes of co-operation among social partners and active demonstrations of stability by the political leadership, "for example, an end to the perceived rift between the president and the minister of finance", says Kweyama. Over the long term, however, what is needed is pro-growth economic policies on the back of an improved regulatory environment for business to thrive, create jobs and generate the tax revenue on which the state ultimately depends, she adds.
RMB forecasts growth at between 0% and 0.5% in 2016, rising slightly to 1% in 2017.
The main concern around such low growth is that it happens together with a much quicker growth in the population, Le Roux says. "For South Africans to experience real progress in living standards, gross domestic product must grow at a rate faster than the population growth rate of around 1.5%/year."
In other words, he says, even if the economy expands at about 1% next year against near zero this year, in per capita terms SA will still be going backwards. It’s a point the rating agencies make in their assessments.
Reserve Bank governor Lesetja Kganyago said recently that while the Bank would upwardly revise its economic growth outlook from the current 0%, growth for the year would still be low.