The Rand Merchant Bank (RMB) and Bureau for Economic Research (BER) Business Confidence Index (BCI) remained unchanged at a low 41 points during the second quarter of the year, indicating that 60% of the survey respondents continued to be unhappy with prevailing business conditions.

Events that could have influenced the sentiment to various degrees included the platinum sector strike, which was now in its fifth month, as well as other smaller strikes such as that in the sugar sector and the threat of industrial action in the metals and engineering sector, RMB said.

The bank added that confidence might also have been impacted by spillover effects from the countrywide power outages in March, the large number of public holidays in April, and the national election and subsequent new Cabinet appointments, in May.

On the other hand, the prime interest rate had remained unchanged since February and the petrol price had decreased in recent months.

RMB pointed out that, while the impact of electricity shortages, supply disruptions in the platinum sector and their spillover effects to manufacturing could not be denied, there was also a more fundamental problem in constrained consumer demand.

“As such, the RMB/BER BCI remaining unchanged at a low 41 points may well be reflective of the economy already being in a technical recession, [which is] defined as two consecutive quarters of negative gross domestic product (GDP) growth,” RMB said.

However, the bank noted that, for the year as a whole, GDP growth was still expected to expand by around 1.5% to 2%.

"If the services sector, coupled with agriculture and construction more or less maintain their first quarter growth momentum, a return to more normal conditions in the platinum industry would give the economy a kicker in the second half of the year,” RMB chief economist Ettienne le Roux said in a statement.

Meanwhile, Investec economist Annabel Bishop stated that proposed increased State intervention, custodian ownership and control of the South African economy, with particular focus on the erosion of private sector property rights, was significantly contributing to low business confidence in South Africa.

"This is because there is typically a substantial financial outlay to acquire ownership of property rights, and any increased risk to the returns, or ownership of the property rights, tends to increase costs, and so decrease the confidence of business to invest, expand and employ. Besides the Promotion and Protection of Investment Bill, the Expropriation Bill and the Final Policy Proposals on 'Strengthening the Relative Rights of the People Working the Land' are also undermining South African business confidence," she said.

SECTOR CHANGES
The second quarter BCI indicated that, while the mood soured notably among manufacturers, and to a lesser extent among building contractors and wholesalers, confidence of retailers and new vehicle dealers improved, but remained in net negative territory.

Manufacturing confidence declined from 41 to 25 index points, reaching its lowest level since the start of the economic upswing in 2009.

“The deterioration in sentiment can mainly be attributed to lower sales volumes and a related deterioration in profitability. While the ongoing strike in the platinum sector has adversely affected suppliers of items such as chemicals and machinery, it was not the only drag on manufacturing,” RMB said.

In addition, domestic sales in the sectors with no link to platinum mines also weakened, while export sales volumes deteriorated as well.

“The fall-off in domestic sales can easily be explained by insufficient domestic demand, but the sudden loss of momentum in export sales volumes is puzzling; the rand has not strengthened much since the February BER survey and global growth, on balance, has improved.

“This leaves sector-specific reasons like the temporary shutdown of a vehicle manufacturing plant due to retooling, and Eskom’s rationing of electricity to energy intensive manufacturers after the March power outage, as possible reasons for the abrupt fall in export sales,” RMB explained.

BNP Paribas economist Jeffrey Schultz stated that weak export volume growth was, however, expected to improve during the second half of the year.

Further, in aggregate, building confidence declined from 49 to 45 index points during the quarter, while wholesale confidence edged lower from 47 to 44 index points as sales of especially consumer goods remained subpar.

Meanwhile, retail confidence increased from 39 to 49 index points in the second quarter, while confidence among new vehicle dealers bounced back to 43 index points, after having fallen from 41 to 27 in the first quarter.

Schultz, however, stated that both of these "improvements" in confidence had to be seen in context given that they both remained below their neutral level of 50, with the BER having highlighted that sales volumes in both of these categories remained muted.

"We continue to hold the view that a constrained consumer climate thanks to higher domestic inflation, the prospect for rising interest rates in the second half of the year and a still weak labour market will continue to place pressure on the consumption side of the economy [going forward], he said.