Treasury’s economic policy paper fails to spark enthusiasm
The Bureau for Economic Research (BER) reported on September 11 that South African business confidence plunged to a 20-year low in the third quarter of 2019. The Rand Merchant Bank (RMB)/BER Business Confidence Index (CCI) fell from 28 in the second quarter to 21 in 2019Q3, indicating that eight out of every 10 survey respondents are unsatisfied with prevailing business conditions. The BER noted in its report (available here) that executives were less downbeat during the global financial crisis (2009) and that current sentiment levels are akin to those seen in the emerging market debt crisis in the late 1990s.
The BER and RMB indicated that confidence “collapsed” in four of the five sectors surveyed. On a scale of 0 to 100, where 50 is the breakeven level between pessimism and optimism, all five sub-indices are now lower than 30: “a shocking outcome”. Adding to the significance of the outcome, the survey for the 2019Q3 publication was conducted between mid-August and early-September. This was prior to the latest outbreak of xenophobic attacks, which could have weighed even more on surveyed sentiment. Also, the survey period overlapped with the release of the National Treasury’s economic policy paper, which clearly failed to spark enthusiasm.
In the secondary sector, growth in factory production remained weak, with manufacturing confidence weighed down in the third quarter by weak domestic sales and worsening conditions in the export market. Building confidence worsened as residential activity registered the biggest drop-off in a decade, while weakness in non-residential activity continued. In the tertiary sector, retail confidence was pressured by dismal sales volumes while wholesalers reported a plummet in sales growth, especially in non-consumer goods. Confidence among vehicle dealers was at a level consistent with contracting sales volumes. Overall, aggregate business confidence was dismal.
The BER and RMB sent out a strong warning with the latest business confidence report: “it would appear if more and more business people participating in the BER’s survey are simply giving up hope – a concerning development, and one that spells even greater trouble ahead for an already weak economy”. In a report published on September 4, IHS Markit noted that private sector operating conditions deteriorated for the fourth month in a row during August, and that new orders fell for the fourteenth consecutive month. In a separate report also released on September 11, the South African Chamber of Commerce and Industry (SACCI) commented that the South African economy “is in dire need of implementation of policies to achieve economic growth and job creation”.
The National Treasury’s reform-focused economic policy paper published in late-August was aimed at supporting local business and consumer confidence. The document indicated that a package of structural reforms could lift economic growth by 2.3 percentage points over the long term. Most economists cautiously welcomed the contents of the document. However, the plan received strong negative feedback from key stakeholders in policy formulation, including labour unions and other elements within the ruling alliance. Conflicts within the governing alliance and the state’s inability to implement economic policy plans clearly had only adverse effects on business sentiment.
South Africa desperately needs to resolve this quicksand situation. Low business sentiment – current levels seem too weak to refer to as ‘confidence’ – is holding back the investment required to get the country’s economy to a level that exceeds population growth. For the past four years, real economic growth has been below the growth rate of the population, resulting in a decreasing size of the economy pie associated with every resident. This is likely to continue for a fifth straight year in 2019. The structural changes proposed by the National Treasury paper could help resuscitate the local economy and business sentiment along with it. However, whether it will gain traction is seriously in jeopardy.