Business Confidence increases for first time this year – what does it mean for SA?

The latest South African business confidence index has risen to 46 points, which is a substantial move upward from its level of around 40 that has been the standard for the last year. Any number below 50 represents negative sentiment toward the business environment and any number above 50 represents positive outlooks coming from the 2,300 firms surveyed. The good news is that all sectors have been viewed more positively except for the new vehicle sales sector. Alec Hogg was joined by Etienne le Roux, Chief Economist at RMB to unpack exactly what the numbers mean for SA in the future. – LF

ALEC HOGG: Joining us now to talk interest rates and the Business Conference Index, for the third quarter of the year, is Ettienne le Roux, who is Chief Economist at RMB but first of all, Ettienne; it's your day of results, of being part of First Rand.

ETTIENNE LE ROUX: Yes, it is indeed.

ALEC HOGG: What happens within an organisation when you get numbers like you came out with today, which really are just giving the rest of them in the market a hiding.

ETTIENNE LE ROUX: Absolutely, I think there's a sincere sense of pride. It's fantastic to work for an organisation of that calibre and it shows in the results Alec, so it may long last.

ALEC HOGG: And that story that Patrice suggested that Wesbank could, one day, be a separate entity, is that consistent to the way you guys operate?

ETTIENNE LE ROUX: I wouldn't know. The higher powers, obviously decide about these things.

ALEC HOGG: Patrice just mentioned this now.

ETTIENNE LE ROUX: Yes, once again, I don't think I can comment on that but I think that one aspect that Patrice highlighted is the cross-competition, if you wish, between Wesbank, between FNB, and between FNB private clients and RMB private clients, or private bank for that matter. That's also the reason why we are so successful.

ALEC HOGG: Well, hopefully the Business Confidence Index is going to start getting equally successful.

ETTIENNE LE ROUX: Let's hope so.

ALEC HOGG: It's picking up in the third quarter.

ETTIENNE LE ROUX: It is.

ALEC HOGG: Some good news, for a change.

ETTIENNE LE ROUX: It is, absolutely. The index has been that, around 40 for almost a year now, so to go up five points, is noticeable. Sadly, it is not yet in that net positive territory, so we're not yet above 50. At 46 but we're moving in the right direction.

ALEC HOGG: But isn't that just a rebound from the really, dark days we've had in the first half of the year?

ETTIENNE LE ROUX: Not necessarily, Alec. If you look at it, the improvement in confidence was quite broad-based. It was four out of the five sectors that we cover that actually showed an improvement in sentiment and that's pleasing. That in itself, I think is a good story. Once again, we shouldn't go overboard here. It is still tough. Economic conditions are very challenging and I suggest that there's still a small majority of our respondents that are still pessimistic. In other words, '46 index' is still below 50.

ALEC HOGG: So 54 negative – 46 positive. We're moving in the right direction.

ETTIENNE LE ROUX: We are moving in the right direction.

ALEC HOGG: Coming from 40 but what, was interesting was building contractors. That sub-sector, all of a sudden they've got a smile on their face again.

ETTIENNE LE ROUX: Yes, more so building contractors doing business in the residential market. Not so much on the non-residential side, which is odd.

ALEC HOGG: That's homebuilders, isn't it?

ETTIENNE LE ROUX: Yes, so property, and real estate and building houses and so forth, which is quite odd actually, if you think about it. The economy is growing at one percent and yet here have builders in the property market feeling pretty upbeat.

ALEC HOGG: But isn't that because the banks are giving a little bit more home finance?

ETTIENNE LE ROUX: I think you are spot on, Alec. I think that is part of the reason. There's no doubt that banks have become a little bit more lenient, in handing out or giving mortgage loans. But I also think it is a function of supply, or the lack thereof. Private sector investment in the property market, thinking of developers for example, has been very, very low over the last four or five years. I think there's a shortage of stock. Our sister company, FNB and their real estate survey, suggest that more and more estate agents are complaining, when it comes to a lack of stock or good quality stock, which is inhibiting activity in their market. I think there's a little bit of improvement in demand, on account of what banks are doing but there's a shortage of good stock.

ALEC HOGG: Has it been reflected in house prices yet?

ETTIENNE LE ROUX: Yes, indeed. Once again, if I can fall back on FNB, house price inflation, for the last two years, have been steadily grinding higher, so year-on-year price inflation is certainly on the up.

ALEC HOGG: Well, that's some good news for South African consumers.

ETTIENNE LE ROUX: Yes, talking about consumers, once again I think we have to differentiate. The retailers selling to high-income consumers are arguably, better placed than retailers selling to low-income consumers. That differentiation, I think is quite important and you also…

ALEC HOGG: I guess we've got Woollies versus Shoprite…

ETTIENNE LE ROUX: Yes, that's a very good example. Then there are also pockets that are not doing too badly. In the third quarter, for example, we saw sales of clothing, footwear, DIY and hardware not doing too badly, so that little, that part, hardware perhaps, to some extent talks to the residential property market. If you particularly go into wholesalers of non-consumer goods, building material particularly, have picked up quite nicely in the third quarter, so once again, it talks again to the residential property market showing nice growth.

ALEC HOGG: It's nice to pull them altogether but when you have a look at the new car sector, and we saw that in Wesbank's results being a little, neutered compared with the rest of First Rand.

ETTIENNE LE ROUX: Yes, absolutely. That's a good expression there.

ALEC HOGG: Your indices are really awful.

ETTIENNE LE ROUX: No, but in the third quarter the index came down 15 points, so…

ALEC HOGG: How was that possible?

ETTIENNE LE ROUX: The level is quite low, it's 28. I think we had, at the time, in the second quarter; it was very difficult to explain why the index went up as much as it did. It went to 43 and now suddenly it came back. Maybe that is part of the answer, but generally speaking, if you look at NAMSA data, new passenger vehicle sales, year-on-year has been contracting. That's certainly a discretionary item. It's a 'big ticket' item. People can delay the purchase if they want. Interest rates are going up. Most of that is being, done on credit, so it is understandable that that part of the industry is taking pressure. What is interesting, Alec is that while confidence of new vehicle dealers, have come down quite sharply. Confidence levels among dealers, selling second hand cars are going in the opposite direction.

ALEC HOGG: Okay, so keep your house. Go and buy yourself a second hand card and you should be a happier person. Thanks Ettienne, who's a very, happy person. He's the Chief Economist at RMB and RMB is part of the First Rand Group, whose results were out this morning.