Business confidence is now at its lowest since 1975 – 45 years ago – when the Bureau of Economic Research (BEO) at Stellenbosch University started measuring this economic indicator.
The quarterly index point plunged from 18 in the first quarter to just 5 points in the second quarter, describing RMB in a statement as an “enormous shock of confidence” due to the Covid-19 health crisis and associated containment. RMB issues the index with the BEO.
The poll on which the index was based was conducted online between May 13 and June 1, when South Africa was past the worst level of containment. The country was at level 5 from March 27 to April 30, at May at level 4 and from June 1 at level 3.
At level 4, however, most businesses were still closed, with the exception of food and clothing retail, e-commerce and some other sectors that could at least partially do business.
The survey was conducted among 1,800 executives in construction, manufacturing and trade.
The Business Confidence Index is considered an early indicator of economic growth and firm investment by private companies.
RMB expects gross domestic product to contract “like never before” in the second quarter. Many economists expect a quarterly contraction that could reach deep into the 20%. South Africa is already in recession.
The previous low of the poll was the 12 points recorded in the third quarter of 1985 and the fourth quarter of 1977. Then the low business confidence coincided with political turmoil during apartheid.
This time things were completely different, says RMB – it was caused by the completely unexpected pandemic that resulted in almost the entire economy, with the exception of manufacturing and selling essential products and services, closed its doors for five weeks.
“Almost overnight, a large part of the business sector had no income, but they were still liable for expenses (such as rent, wages, interest on loans and payment of previous deliveries). Those who were able to do business had to face the disruption of supply chains and incur additional costs to keep employees and customers safe. ”
Business confidence in all five sectors measuring the index has fallen.
Retail confidence was the only one that did not fall below 10 points. However, it did drop from 18 to 11 points. The reason is that certain sectors of the retail sector were still able to do business, even at level 5. Sales of food, toiletries and medicines continued. In May, sales of winter clothing and hardware were allowed, and in June all retail was opened. Furniture, appliances and electronics sales have been stalling for almost two months.
- Motor Trade
Also, cars could not be sold before June 1, causing the index for this industry to tumble from 16 points to just 2.
The building industry remained stationary for most of the period. This industry’s business confidence fell from 15 to just 2 points.
Certain types of manufacturing – including food, detergents and toiletries – could continue throughout the restriction. RMB says that while food production represents a large percentage of manufacturing, these manufacturers’ performance could not compensate for the other sectors. Manufacturing of cars and auto parts, machinery and metals, among others, largely stopped at levels 5 and 4. Manufacturers’ confidence dropped from 17 to 6.
This industry’s confidence fell from 25 to 4. The industry is regarded as an important link in the economy – among other things between agriculture, manufacturing, trade and mining – and also as an important link between South Africa and the rest of the world. “So it’s not surprising that the near-term downturn in operations in those sectors has also disrupted wholesale.”
Ettienne le Roux, RMB’s chief economist, says business confidence will look better in the third quarter as economic activity may resume over time. However, great uncertainty still prevails over the infection curve of the Covid-19 virus disease. “The road to (partial) recovery is likely to be slow and bumpy.”
In the building industry, many planned projects have already been canceled and manufacturers are “aggressively” cutting back on fixed investment. Retailers of clothing, furniture and electronics are skeptical whether sales will rise sharply, Le Roux says.
Consumer confidence is also expected to decline, which could cause consumers to focus on essential spending, such as food.
“Throughout the economy, firms are likely to experience pressure on their income as costs rise, while weak demand will keep prices low. Many will have to find new ways of doing business, probably with fewer employees. ”
Preliminary estimates are that between 1 million and 7 million people lost their jobs because of Covid-19. Although some positions will be filled again if restrictions are lifted, a sharp rise in unemployment – already at the record level of 29.1% – is expected.
RMB says respondents in all sectors are “very pessimistic” about business conditions going forward.
The lack of business confidence could put a damper on economic activity, which could slow the pace of recovery and may even have a long-term impact on South Africa’s growth potential, Le Roux believes.
“Covid-19 has drastically changed the already poor economic landscape, in some cases even permanently. We are only now beginning to see the complex economic impacts of the pandemic. ”