Long-awaited State construction spend kicking in – 70% of exposed builders upbeat: RMB research
The 40 year graph of SA's quarterly Business Confidence Index shows the country to be a lot better off than the media mood would suggest. Sure, there's been a downturn, but nothing near the experience of previous cycles. And some sectors are positively rocking. Like parts of the construction industry exposed to State infrastructure spend which after lengthy delays is starting to work through. A bull point for construction stocks including PPC, whose CEO also spoke to us today. If this interview with RMB's chief economist Ettienne le Roux doesn't get you excited about the "profit pockets", not sure what will. – AH
ALEC HOGG: The RMB/BER Business Confidence Index remained flat in the final quarter of the year, increasing by only one point to 43. That's below 50, so it's still negative. Ettienne Le Roux, Chief Economist at RMB is with us in the studio. Yesterday we spoke with I suppose, your family colleague – in a way – Cees Bruggemans, about the Consumer Index. That was also one point up, but from a low-level. I guess you're painting a similar picture for us.
ETTIENNE LE ROUX: Yes Alec, just go back two quarters: this confidence fell by four index points in the second quarter, six in the third quarter, and now flat. I think the fact that it hasn't fallen further is good news. If you look at it, one index point move is hardly any good news, but the results are actually quite interesting if you look at the different sectors that we've covered and we've covered five of them. Here we have for example, confidence among retailers falling quite a bit, but confidence among building contractors and wholesalers picking up quite nicely – almost neutralising all of that, and then confidence levels are flat amongst manufacturers and new vehicle dealers.
ALEC HOGG: You've painted a good picture. We have a graph of the index itself, which our director is going to put on the screen in just a moment, but it's still a long way from the depths of despair where we're at right now.
ETTIENNE LE ROUX: Yes Alec, the important point for me, is that even at these low levels, it is consistent with the economic upswing continuing. You just have to bear in mind that the economy bottomed in 2009 and yes, we've seen many stop/go processes along the way and the upswing has been relatively modest. However, these upswings are still relatively consistent with the economy continuing to expand.
ALEC HOGG: Just look at that graph, because we have it on-screen there (see below). It's almost as every other dip was a lot lower than every dip that we saw in 2009. Isn't that interesting? 99…round about 93, so in some terms you could say we got away quite lightly.
ETTIENNE LE ROUX: Yes, I guess so if you look at it from the bottom, it's an upward trend so we're moving in the right direction. Yes, there are few ups and downs, but once again, it's consistent with the economy expanding so this is not depressing stuff suggesting that the economy is about to go into a recession and that the economy is not going to retract at all. Once again, the results are pretty interesting if you look at the sectors. Wholesalers for example: their confidence level is above 50. If you dig a little bit deeper in the construction sector and you get some of our respondents that derive much of their business from the public sector – their confidence levels are almost 70. There are therefore pockets/certain industries, that are doing much better than others are, so it's not a depressing picture at all. I think the fact that it's stabilising at relatively lower levels in negative territory, is good to the extent that it suggests that the economy – modestly – continues to grow.
GUGULETHU MFUPHI: You mentioned that the data isn't that depressing and that the outlook could look much better than what it is now, but what might some of the contributing factors be that could change the situation?
ETTIENNE LE ROUX: Well, it will certainly help if the global economy picks up momentum. As a small emerging market economy, that's always a big deal. When the global growth is weak, it certainly does affect the mood amongst the locals.
GUGULETHU MFUPHI: Unfortunately, that's beyond our control in South Africa.
ETTIENNE LE ROUX: Indeed, so there are SA-specific factors and I think that here we know what's wrong. The National Development Plan has done a pretty good job in telling us what's wrong and what needs to happen with the economy. If we can improve the level of skill, if we can improve the level of competition in product markets etcetera, and at the same time, if we can improve the working relationship between the government, the private sector, and trade unions, I think we will be surprised by how quickly we can grow this economy.
ALEC HOGG: I'm just looking at a graph here of the construction sector and it seems – just to pick up on what you said a moment ago – it's done pretty well in the last few months: Construction shares with an index of around 42 to an index of around 48 at the moment.
ETTIENNE LE ROUX: Alec, a year and a half ago that was in the mid-twenties and now we're at 47 if you look at the index. This is a sector, which doubtless, is slowly on the mend and slowly coming back to life. It's a slow but persistent recovery: more so perhaps on the non-residential side than on the residential side. Nonetheless, it's clear that in the fourth quarter we saw building activity picking up quite nicely. There is a similar kind of picture when you look at subcontractors, so if you look at plumbers and electricians, they're also a little bit more upbeat.
ALEC HOGG: We're talking to Ketso Gordhan in just a moment, but one of the things that came out of the PPC Cement results is a seven percent growth in cement sales, so that talks to exactly what you're saying about construction.
ETTIENNE LE ROUX: Yes, and earlier I also talked about civil respondents deriving business from the state. Their confidence levels have picked up quite nicely over the last couple of quarters, so that clearly must be a reflection of the fact that government's infrastructure, projects, and investment in addressing some of those issues an bottlenecks, are certainly starting to pay dividends. Our respondents are showing it and it's certainly helping the mood in that sector.
GUGULETHU MFUPHI: Just…on the labour issue in South Africa, we know that this is something that affects several sectors in the South African economy. Have some of your respondents taken that into account?
ETTIENNE LE ROUX: In the third quarter – remember the big transport strike – so the manufacturers of transport equipment doubtless saw a dip in their activity in the third quarter, but that bounced back nicely in the fourth quarter. That certainly gave manufacturing, broadly speaking – a bit of a boost. Manufacturing is interesting because confidence levels stayed flat in the fourth quarter, but if you look at the underlying data, it is far more encouraging. We saw production picking up. We saw domestic sales volumes picking up. We saw export volumes picking up. The weaker currency is therefore certainly helping not only manufacturers that usually export, but also local manufacturers that compete with imports that are becoming more expensive as the rand has weakened. The underlying picture is far more upbeat than the headline index would suggest. I think one reason may be that many of our respondents are turnover and volume up, but costs are also rising. Many of our respondents are complaining about raw material costs that are going up quite a bit. This means that sales and production are up, but profitability is not necessarily growing at the same rate, so that may be depressing the mood somewhat.
ALEC HOGG: What's going on here? Yesterday we had Cees Bruggemans telling us that he can't understand. Things are going okay in the economy, but confidence is down. Here again, we've had two terrible falls in your index to take confidence into pretty negative territory at 43. Yet, the picture when you look at it from a longer term is not so bad. You have quantitative easing pumping money into the global system, so we can't really complain too much. Yet, the confidence levels are not across the board.
ETTIENNE LE ROUX: Well, I think you have to once again be specific here. Retail is also very interesting. If you are retailer of semi durable goods, your confidence levels are much higher than retailers of non-durable are and durable goods are. A similar story: if you're selling new cars, your confidence levels will be quite low, but wholesalers of building materials – there confidence levels are much higher, which is consistent with the building sector, broadly speaking, that's in recovery mode. I think we have to be specific and you have to differentiate a little bit in terms of the results, but there are consistencies. Wholesalers of building material/construction are one. If you think about wholesalers of semi durables: confidence levels are much higher.
ALEC HOGG: Pockets of profit…
ETTIENNE LE ROUX: Pockets of profit: that's a very good description.
GUGULETHU MFUPHI: Do you see why I hang out with him so often? Are there any particular sectors that surprised you?
ETTIENNE LE ROUX: Not really…in a third quarter, looking forward, and then into the fourth quarter it was pretty clear to us that confidence was not going to move much either way. I think, if you go back a couple of years and the pattern repeats itself – like what we saw in the last three to four years – we will probably see confidence levels picking up a little in the first quarter of next year. Coming back to my opening remarks again the fact that it is sitting at 40 levels – if you look at the overall index that is not necessarily a bad picture. It is consistent with an economy that's growing modestly – yes – but an economy that's ticking over. We're talking about a two percent UDP growing economy – hopefully a little bit faster than that next year. I think the frustrating thing for me is that we know what is wrong with the economy, but it's not necessarily being addressed with the vigour that it requires, and we talked a little bit about the constraints earlier on. If we address those issues, the economy can do much better than what we've experienced in the last two to three years.
GUGULETHU MFUPHI: So there is light at the end of the tunnel.
ETTIENNE LE ROUX: Certainly.
GUGULETHU MFUPHI: Ettienne, thank you so much for your time. That was Ettienne le Roux, Chief Economist at RMB.