For the first time in nearly two years the RMB/BER Business Confidence Index has breached the neutral mark of 50, coming out at 51 indicating a positive move in business confidence based on a survey of businesspeople in five sectors within the South African market. Alec Hogg was joined on CNBC Africa’s Power Lunch by Ettienne le Roux, RMB’s Chief Economist to unpack what exactly the numbers mean and how each sector responded to the survey. – LF
ALEC HOGG: We do have in the studio though, RMB’s Chief Economist Ettienne le Roux, with some very exciting numbers. We’ve heard too often on this program – and I’m often accused by people saying ‘why are you such a gloomy Gus’. Well, sometimes there is good news and indeed, on the RMB Business Confidence Index it is good news Etienne, for the first time in ages.
ETTIENNE LE ROUX: Finally.
ALEC HOGG: Businessmen or businesspeople are saying… Let’s just start at the beginning. An index score of 50 means it’s neutral.
ETTIENNE LE ROUX:Â Yes.
ALEC HOGG: The index has been below 50 for a while – just broken above it now.
ETTIENNE LE ROUX: One hundred percent, for the first time in almost two years. We’re just in nett positive territory.
ALEC HOGG: Why?
ETTIENNE LE ROUX: But it’s good news. Remember Alec, we cover five sectors and we had quite a nice, upbeat response from people in the building industry, particularly on the residential building market and that recovery has been going on for the last two to three years. It definitely is good news there.
ALEC HOGG: Clearly, RMB is not FNB, but you would have had a good view of what’s happening with lending by banks, into the home industry. Is that replicated in what you’re seeing from the construction sector?
ETTIENNE LE ROUX: Indeed, banks are becoming a little bit easier in providing mortgage loans – no doubt about that – and that is backed up by Central Bank data. In the Rand value of new home loans granted, we’ve seen quite a nice improvement there, so that’s good news. In addition, talking about FNB, some of their property surveys are showing very clearly, that more and more real estate agents are actually complaining about a lack of stock…so, a shortage of good quality property to sell.
ALEC HOGG: Which is good for the people in your survey, who build houses.
ETTIENNE LE ROUX: Absolutely. Alec, there’s a consistency there and here, we’re talking about an index level as high as 66, so that is a strong nett positive territory. We’ve also seen quite a nice improvement in confidence amongst manufacturers. Now, that’s important. Manufacturing is a big sector in the economy.
ALEC HOGG: Given the strike we’ve just come through.
ETTIENNE LE ROUX: Absolutely. Some of it may simply be a bounce back after the strike that we saw in the third quarter. More importantly, if you look at the underlying data, you’ll see the domestic sales orders and export sales orders and volumes for that matter, has improved. That’s quite encouraging. What we’ve also seen is that production is up – not as much as sales volumes -, which means that many of the manufacturers have satisfied improving demand by selling inventory. However, now we’re at a point where inventories are quite low so if the demand is sustained, production can actually pick up quite nicely in future quarters.
ALEC HOGG: This is an interesting point because when the Rand weakens, it does make South Africa produce products more competitively.
ETTIENNE LE ROUX:Â Absolutely.
ALEC HOGG: So you would expect to see some improvement if we get Labour Relations fixed
ETTIENNE LE ROUX: One hundred percent. Except for those own goals and SA-specific factors, we are truly in a very favourable environment for exporters. Just think about it. Global growth is improving moderately, but moving in the right direction. The Rand is weak and all prices are at almost record lows again. It’s a very favourable condition if you’re a competitive exporter to begin with – if you’re running a lean and mean business. It’s an excellent environment and you couldn’t ask for much more than what you currently have.
ALEC HOGG: But entrepreneurs are resilient. We heard that from Karl Kumbier a little bit earlier (from Mercantile Bank), so by now, they would have shrugged off the strike and said ‘well, let’s look ahead. Let’s perhaps invest a little bit more and become more confident into the future’.  Is that what you’re seeing in your numbers?
ETIENNE LE ROUX: Yes, to some extent and especially if you take the view that the Rand (at least, in our opinion) is going to stay undervalued for quite some time. For us, the Rand weakness is just not a flash in the pan. It’s here to stay because we argue that economy, given how imbalanced it is, needs the currency to stay weak for longer. If that is indeed, the case, and global growth and the recovery we’re seeing there does what we hope it will, so much more reason to see a little more fixed investment in export-orientated sectors, so that’s good.
ALEC HOGG: There is a bright side to the political issue that seem to bedevil the headlines. All right. We’ve spoken about two of the sectors: construction and manufacturing. What about the other three?
ETTIENNE LE ROUX: Yes, retail is also interesting as well and we saw it in today’s GDP data. In the third quarter real value-add of wholesalers, retailers (all combined) grew by three-and-half percent-annualised rate, which is pretty decent. Here we’ve had a situation where confidence amongst retailers have been a nett positive territory for a while now. Yes, it dipped five points in the fourth quarter, but it’s still 55. The nett majority of retailers are pretty upbeat about things. It surely is suggestive of the fact that… Our survey results would suggest that slowly, but surely, trading conditions for many retailers continue to improve. Now, I say ‘many retailers’. Obviously, you have to differentiate. What our survey results show is that retailers of non-durable and to some extent, durable goods are doing a little better than for example, retailers of semi-durable goods.
ALEC HOGG: It’s interesting. In the Steinhoff acquisition today of Pepkor, there was mention by the Chief Executive Marcus Jooste of a move to value.
ETTIENNE LE ROUX:Â Absolutely.
ALEC HOGG: Are you seeing that in your results as well, that the lower end of the market is doing better?
ETTIENNE LE ROUX: We’re seeing that specifically in the car market, Alec. Here, we have a situation where, if you survey dealerships of new vehicles, they are downbeat. There isn’t a good story. Dealers of second-hand vehicles are a very upbeat bunch of people; so doubtless, there’s a switch from more expensive new cars to more affordable second-hand cars. People are looking for value.
ALEC HOGG: So who’s struggling?
ETTIENNE LE ROUX: Well, new vehicle dealers are struggling. Confidence levels are still low at about 30, so that tells you that. Other strugglers would be… Considering the fact that the Manufacturing Index is still below 50… Once again, we talked about the underlying picture in the manufacturing sector not doing too badly. All in all Alec, three sectors are doing okay. Two are struggling – new vehicle dealers and wholesalers – where confidence didn’t change. It stayed flat in the fourth quarter.
ALEC HOGG: When you look at it overall, it’s an interesting graph – the Business Confidence Index – because it’s coming from below and it almost gives you the impression that it’s about to start shooting strongly above that 50 level. Is that just an optical illusion?
ETTIENNE LE ROUX: No, I think… Just go back over the last two years. It’s almost as though we’ve experienced a stop/go process and the moment it seems to be getting better, then there’s an own goal. It’s industrial activity, unrest, or strike etcetera, putting the economy back. Then you’re just bouncing back and there’s another setback (if not locally, then globally, too). It has been a battle and you see it in the GDP data. The economy has been battling to grow at two percent even. Alec, what our survey results point to is that in the fourth quarter of this year (post all these strikes), we may actually have a much better performance from the economy, GDP wise. Today’s data printed one-point-four percent annualised in the third quarter. I wouldn’t’ be surprised if get numbers like two-and-a-half to three percent annualised in the fourth quarter.
Still, we’re talking about an economy this year, that will probably only grow at somewhere between one and one-and-a-half percent. I think the good news from all of this (and if the fourth quarter pans out GDP wise, similar to what our results survey suggests) we would have a good starting point, going into next year. I don’t think it’s going to take a big push to get GDP growth higher next year, than a weak number this year.
ALEC HOGG: Well, we’re coming off such a low base, aren’t we?
ETTIENNE LE ROUX:Â Fair enough.
ALEC HOGG: So from that perspective, it’s already going to be a lot better. Looking ahead, is it still a structural story? If you’re going to kick this economy into gear…structural issues: is there any signal that they’re being addressed?
ETTIENNE LE ROUX: One hundred percent. Talking about signals…mixed, I guess. The structural issues that we need to address…we’re quite familiar with us. With every opportunity the Central Bank gets, they make mention of the fact that we need to improve the competiveness of the economy. We need to do stuff smarter so that we can see productivity improving. We need to continue to address the structural issues, i.e. the bottlenecks that we have on infrastructure, for example. We really need to push hard on those things. All of those things act as a cap on our growth rate. Lift that and you can really see growth doing much better than what we’ve seen over the last couple of years.
ALEC HOGG: Ettienne le Roux is Chief Economist at RMB. We’ve heard a lot about the resilience of entrepreneurs in today’s program and I guess, if you can just (as Ettienne said at the end there) take that cap off, maybe the five to seven percent growth that we see from countries we envy, could be possible in South Africa.
