Retreating Confidence Accentuates Fragility of South African Recovery

The RMB/BER business confidence index has fallen in the second quarter to 36 from 43 in the previous quarter, reflecting apprehension among business on the strength and sustainability of the economic recovery.

The business confidence index hit a low of 23 in the third quarter of 2009, after which it recovered buoyantly to 43 in the first quarter of 2010 before slowing again. This trend was anticipated by the South African Chamber of Business (SACOB) monthly business index, which sank back to 82.0 in May from 84.1 in April and the Trade Activity Index (TAI) that dropped to 47 in April from 56 in March 2010. IHS Global Insight cautioned on the seeming over-optimism in the economy as several high frequency indicators did not underscore this trend.

High Frequency Indicators Slow to Improve
The most recent monthly indicators still point to a delicate start to the upswing. Starting off, credit extension to the private sector is not only still contracting, but with no credit appetite from both companies and consumers is also not expected to gain momentum until year-end or even later, keeping consumption expenditure subdued.

Latest vehicle sales show some loss in momentum as the three-month annualised percentage growth in total vehicle sales, as reported by the National Automobile Association of South Africa (NAAMSA), slowed from 110.5% in March 2010 to 63.9% in April and 30.4% in May. A plunge in confidence in new vehicle trade from 60 in the first quarter to 48 in the second quarter reflects, according to the report on confidence, dealers' apprehension about the sustainability of strong growth in the first quarter of 2010. A drop off in pre-FIFA World Cup football (soccer) sales can be partly blamed for this slowing but still tight credit conditions and the consumers' large debt burden along with a drop in confidence levels are bound to see slower sales increases in the second half of 2010.

The construction sector by nature lags the cycle, and this was reflected in the fall in confidence in the building sector from an already low 26 to 20 index points, reflecting, according to the respondents, insufficient domestic demand as the biggest constraint they face. Despite nominal house price growth of 15.2% in May 2010, according to the Absa house price index, total building plans passed in March 2010 still reflected a contraction of 24.8% on a three-month annualised percentage growth basis. This indicates very weak construction activity for the rest of the year.

The effect of recent strike activity in South Africa and unease over increased global volatility as sovereign debt problems unfolded in the Eurozone also hit manufacturing confidence. The latest seasonally adjusted Kagiso/BER purchasing managers' index (PMI) dipped considerably in May 2010, following two months of slowdowns, while the RMB/BER business confidence index showed business mood in manufacturing remaining largely unchanged at a level of 27 (compared with 28 previously). A sustained recovery in manufacturing will only follow on an improvement in local demand.

Outlook and Implications
It could be argued that confidence levels are just returning to more realistic levels following the boost in the beginning of the year, but concerns to the growth picture are quite pertinent. Anxiety regarding the implications for global economic growth following from the European debt crisis, a lull in economic activity following the World Cup frenzy, and the absence of further monetary and fiscal stimuli will affect economic activity in the second half of 2010. Positive signs to support our view of a continuous improvement in growth, albeit slow and in smaller increments, include domestic retail figures sales growth venturing into positive territory in March following more than a year of contraction in this sector. Also, electricity available for distribution in South Africa is improving steadily, with the declines slowing to -0.5% in April from -1.4% on a three-month annualised percentage growth basis. Although a case could be made for further monetary loosening on the expected slow economic growth and easing inflation, we highlight the ideal opportunity to create stability and predictability in the market by sticking to an unchanged monetary stance for longer. Given the precarious fiscal environment in Europe and increased global volatility we thus do not expect the weak domestic growth situation to initiate an interest-rate cut, but rather expect interest rates to stay on hold in South Africa until well in 2011.