Business confidence at a record low as Covid-19 strikes

RMB media release

The RMB/BER Business Confidence Index (BCI) fell from 18 to merely five points in the second quarter. This is the lowest level ever recorded since the BER first began conducting its business confidence survey in 1975. Strikingly, a reading of five indicates that just about every respondent in the second quarter was unsatisfied with prevailing business conditions.

Figure 1: RMB/BER Business Confidence Index. Source: BER, SARB (Shaded areas represent economic downswings)

The second quarter survey was conducted online between 13 May and 1 June. It covered about 1800 executives spread across building, manufacturing and the domestic trade sectors i.e. retail, wholesale and motor trade. Over time, business confidence in these sectors has proved to be a reliable, early indicator of GDP growth and private fixed investment. The fieldwork for the second quarter survey covered the period during risk level 4 and the announcement of the switch to the less restrictive level 3 on 1 June. At lockdown level 4, most businesses were still prohibited from operating or could only operate on a limited scale – barring those producing and selling ‘essential’ goods or inputs to essential producers and suppliers.

Details

Until now, the lowest BCI on record was the 12 index points registered during the third quarter of 1985 and the fourth quarter of 1977. In both cases, confidence falling this low was the result of uniquely adverse political developments in South Africa. By contrast, confidence in the second quarter of 2020 collapsed primarily due to the unexpected emergence and spread of Covid-19 and the five-week shutdown of almost all non-essential economic activity as a first step to deal with the public health emergency. Almost overnight a significant portion of businesses had no income but continued to be liable for expenses (such as rent, wages, interest on loans and unpaid earlier supplier deliveries). Those that could operate, faced supply chain disruptions and added costs to keep staff and clients safe.

During the second quarter, business confidence declined in all five sectors making up the overall RMB/BER BCI.

  • Retail confidence dropped from 18 to 11. Of all the sectors, retail trade is the only sector where confidence did not fall below 10. Confidence held up relative to the other sectors as sales of essential goods, such as food and pharmaceuticals, and later winter clothing, were allowed under risk level 5. Towards the end of May, hardware sales to tradesmen were also permitted. In contrast, sales of durables, such as furniture, appliances and electronics, came to a standstill.
  • In tandem with retailers of durable goods, new motor vehicle sales also discontinued in the second quarter. As a result, motor trade confidence fell from an already-low 16 in the first quarter to just two index points in the second quarter.
  • Building activity also ceased in the second quarter, with confidence dropping to two from an already-depressed 15 in the first quarter.
  • Food production was permitted throughout the second quarter. Although this is a large sector within manufacturing, food producers’ better performance (also relative to the first quarter) could not compensate for the weakness in other important sectors. Sectors such as metals, machinery and transport equipment were not permitted to operate fully under risk level 4. As a result, manufacturing confidence dropped from 17 to six, so surpassing the previous record low of 14 seen both in 1998, and before that 1985.
  • Wholesale confidence fell from 25 to four index points – a level that is also significantly lower than the previous record low of 12 registered in 1999. Given the inter-linking role that the wholesale sector plays between the various sectors within the economy (e.g. among agriculture, mining, manufacturing and domestic trade), as well as between South Africa and the rest of the world, it is unsurprising that the near standstill in activity in all these sectors severely disrupted the wholesale trade sector too.

Bottom line

On top of an already weak economy, the sudden appearance of Covid-19 and the subsequent restriction of economic activity to manage the health emergency, produced a huge confidence shock. A BCI plunge to five in the second quarter would be consistent with a contraction in real GDP like never seen before.

Although the gradual lifting of restrictions and subsequent resumption of economic activity might well lift confidence in the period ahead, the uncertainty with respect to how the coronavirus infection-curve develops is an important reason for caution. The road to (partial) recovery is likely to be slow and bumpy. To be sure, building and civil construction contractors mentioned that many clients cancelled future projects, while manufacturers cut their fixed investment back aggressively. Simultaneously, most semi-durable (e.g. clothing) and durable goods (furniture and electronics) retailers are doubtful that sales volumes will benefit from pent-up demand being unleashed any time soon. Instead, additional government support to low-income households and a prospective fall in consumer confidence point to households rather restricting their spending to mainly necessities, such as food and pharmaceuticals.

Throughout the economy firms will likely continue to face an income squeeze as costs rise, while weak demand weighs on prices. Many will have to find new ways of doing business, likely using less staff. As a standout, respondents across sectors are very pessimistic about business conditions ahead.

These factors will restrain economic activity and the pace of recovery to pre-lockdown levels. If left unchecked, some may even have a lasting impact on South Africa’s long-term growth potential. “Covid-19 has drastically changed the already-weak economic landscape and perhaps, in some cases, permanently. We are likely only beginning to fully appreciate the complexity of the economic impacts of this pandemic” said Ettienne le Roux, chief economist of RMB.

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