SA business confidence: Still underwater but green-shoots of optimism
The continued battering the rand has received in recent months has dampened spirits as has a range of indicators that gauge business confidence. Sharing his views with Alec Hogg (publisher of Biznews) and Gugulethu Mfuphi on the CNBC Power Lunch on the state of the South African economy is RMB's chief economist, Ettienne le Roux. Although the Business Confidence Index has fallen this year as have car sales and fork lift sales, also measures for some of business confidence, Ettienne is more optimistic about what is happening. He says the real economy must adjust to the currency shock. Manufacturing exporters are already a bit more upbeat than they have been for some time, he notes. Ettienne can't say whether business confidence has further to fall, or has turned a corner, but he is seeing some signs of the economy starting to rebalance. – JC
ALEC HOGG: The Business Confidence Index fell by two points to 41 in the first quarter of 2014, a move that more than offset the recent increase in the previous quarter. Joining us now for more is Ettienne le Roux, the Chief Economist at RMB – Rand Merchant Bank. It's been below 50 now for a while, but below 41 is quite a long way below 50. Maybe you can just bring it into context. Why is 50 an important level?
ETTIENNE LE ROUX: Fifty, Alec, is the break-even level, so as you rightly pointed out the index has been in net-negative territory – in other words, below 50 for about a year now. What that means is that if the index is below 50, it means there are more pessimists than there are optimists, at least when it comes to the respondents in our survey. The BER consults about two-and-a-half thousand firms every quarter, so that typically, would be the respondents in the sample covering five sectors in the economy. On balance, if the index falls to 41, which it did in the first quarter, it means that only four out of every ten respondents are happy, or six out of every ten are unhappy with prevailing business conditions.
ALEC HOGG: You identified cyclical sectors, so it's a leading indicator. I want to give you another leading indicator. We had Walter Hill in the studio – from Eqstra – the other day, and he says his forklift sales are the best leading indicator that he knows of. He's now finding many people coming to his investment presentations to see how the forklift sales have gone.
ETTIENNE LE ROUX: It's an interesting observation.
ALEC HOGG: They were down 25 percent he said, in the last year.
ETTIENNE LE ROUX: Okay, that is interesting. A leading indicator or two others, which to some extent at least, relate to what you're saying is that if you go into the building construction sector, which is one sector we cover, there for example, we look at what architects and quantify surveyors are doing. If that confidence picks up, that tends to be a leading indicator for the non-residential side of the building construction sector. There has been some good news in the first quarter, so if you're talking about leading indicators, there are a couple in our own survey as well.
GUGULETHU MFUPHI: I want us to zone in on construction as well, because when we speak to several Chief Executives – again, like Walter Hill – they mention that business isn't exactly booming when it comes to the government sector.
ETTIENNE LE ROUX: Yes, to the extent that I can answer that question. Civil construction is also a sector we focus on in the survey, and confidence indeed, has fallen in the first quarter. It is still above 50, but it has been coming down, particularly in the first quarter so that is a reflection of the fact that yes, the public sector is still investing in infrastructure, but perhaps not at the speed many people would like to see.
ALEC HOGG: Everyone looks for an angle and I guess that's why I ask you if this is a leading indicator. Is this telling us what's coming in future? If you're a trader, do you need to be nervous?
ETTIENNE LE ROUX: Alec, the index has been hovering at about this 40 level for quite some time, so it's actually not telling us either way where the economy is going. What I would have liked to see is either Business Confidence falling and that trend persisting, or rising and that trend persisting. That would give you more confidence to call the next direction for the economy.
ALEC HOGG: So we're confused at the moment.
ETTIENNE LE ROUX: We are pretty much in nowhere land, if you wish, so we're not getting very strong signals.
ALEC HOGG: Except in the motor vehicle sales. Tell us about that, because that's a collapse: down 14 points in one quarter.
ETTIENNE LE ROUX: That is true. The index sits at a level of 27 and two years ago, that index level was above 70, so there is a big change, but underneath the surface Alec, something encouraging is happening. Okay, let me just explain that a little bit. We know that for the last four years, the economy…we've done very well in consuming, but we've been very lousy in producing. That's the last four years. What our index results are starting to show is that the economy is starting to rebalance – more towards production, and away from consumption, so this is typically, what you're seeing in the first quarter here. You see that confidence amongst the trade sectors, so whether you're a retailer, a wholesaler, or a new car dealer; confidence has fallen in the first quarter and in fact, for the last year, all three of those sectors have seen lower confidence. At the same time, in contrast, you're seeing that confidence amongst – importantly – manufacturers and to some extent, building contractors, which represent industry or more the production side of the economy, has actually been increasing. This is a much needed rebalancing, which needs to take place. This is in essence, how you at some point, are going to reduce your current account deficit, which is absolutely required, to lay a solid foundation for faster growth.
ALEC HOGG: You don't need higher interest rates to accelerate that at this point.
ETTIENNE LE ROUX: Well, if you talk about interest rates, as a minimum I would argue that interest rates would have to go up by another 100 basis points or so. Why do I say that? Currently, the Central Bank forecasts inflation to average more than six percent for the calendar year, but the real rate is negative five-and-a-half percent, so that's still negative real rate. As a minimum, in order to contribute to this rebalancing, I guess you need to go to real rates being zero, which implies another 50 or 100 basis points as a minimum. Are we going to see interest rates going up as severely as we've seen in the old days, by 200 or 300 basis points? No, I don't think so.
GUGULETHU MFUPHI: What about the influence of global factors?
ETTIENNE LE ROUX: Absolutely, and on that score it is positive because we're starting to see global growth accelerating a little bit – more so, driven by the developed economies and less so, by the emerging markets, but it matters. Europe is still an important trading partner. Twenty percent of our exports go there. What we're starting to see – and it was actually quite striking in the first quarter results – is that exporters are becoming distinctly more upbeat. Here, I'm talking about manufacturing exporters. We don't survey the mining sectors. Here, I'm talking about if you make something and sell it abroad, they are certainly more optimistic than a producer that is manufacturing something and selling it in the domestic market. A faster global growth and obviously, a weaker currency, is helping to boost sentiment for our exporters. You see it in export volumes picking up. You see it in exports – orders received – also improving quite nicely…a very favourable development – part of this rebalancing that needs to happen to get the economy to produce more and to consume a little bit less.
GUGULETHU MFUPHI: So for the moment, we're still stuck in no-man's land and confusion. How do we fix that, then? Does it relate more to domestic issues?
ETTIENNE LE ROUX: Well, it depends on the sector. If you ask me 'what is the next move in the Confidence Level' I will say that it depends on the sector you're in. Consumers are under pressure and they're going to stay under pressure for quite some time, so I wouldn't expect confidence amongst the retailers, wholesalers, consumer goods, or new car dealers to improve any time soon. At the same time, if global growth continues to pick up nicely and the Rand stays weak, I would imagine that the improvement in confidence amongst manufacturers persists. Once again, it's industry-specific…sector-specific in terms of the…
ALEC HOGG: So we're rebalancing, but we're rebalancing a lot slower than a very flexible economy like the United States, for instance.
ETTIENNE LE ROUX: Absolutely, but Alec, the point is that we have started that process and the key here is that currency weakness is part and parcel of what is required in order to make that adjustment. Remember, the Rand has halved its value against the Dollar over the last two years. To think that the real economy is not going to adjust to such a weakness is short-sighted. Our results suggests that there are early signs, that the economy is doing what it's supposed to be doing when you confront it with a currency shock.