Steep Fall in Rate of Company Failures
Johannesburg — COMPANY failures plunged last month, while personal bankruptcies dived even more steeply in June, official data showed yesterday, providing some good news on SA's economic recovery.

Liquidations fell 34,3% compared with July last year, the sharpest annual drop since September 2008, when they fell more than 35%, Statistics SA said. Insolvencies dived more than 37% in June compared with the same month last year - the steepest drop since April 2005.

These figures are notoriously volatile, so analysts generally approach them with caution. Nonetheless, they suggest that the recovery in consumer demand is intact, although business is seen to be under greater pressure.

"There is lingering uncertainty about the global and domestic recovery's strength and sustainability," Renaissance BJM economist Elna Moolman said. "That makes it tough for businesses."

Citigroup economist Jean- Francois Mercier said it was "a bit early" to call the fall in liquidations a downward trend.

"My feeling is it is stabilising ... but uncertainty about demand makes business cautious."

Private sector investment has declined this year so far, although consumer spending has revived.

Liquidations in the first seven months of this year fell 1,4% compared with the same period last year to 2346, Stats SA said.

About 45% of the total, or 1070 cases were in finance, insurance, real estate and business services, the biggest sector in the economy. This was followed by wholesale and retail trade, which accounted for 30% of the total.

"This picture is one we would expect to emerge and indeed hope to gather momentum in the months ahead," said Luke Doig, senior economist at Credit Guarantee Insurance Corporation.

"Businesses are still faced with many challenges though, be it on the demand or supply side."

Mr Doig said that threatening claims from his company's corporate clients were a third lower in the first eight months of this year than in the first eight months of last year. "This leads us to expect that the improvement in corporate closures should gather momentum," he said.

But Mr Doig also said a slowdown in economic growth in the second quarter , a downturn in the leading indicator of business activity, and bleak prospects for job creation would prompt the Reserve Bank to cut interest rates at its policy meeting next week.

Most analysts say the Bank will trim its key repo rate by half a percentage point to 6%.

"I don't think it's a done deal, it's a very difficult decision but there is at least a 60% probability of a cut," Ms Moolman said.

She said she did not expect private sector investment or job creation to turn positive until late this year or early next year.

SA's unemployment rate edged up further to 25,3% from 25,2% - a new five-year peak - in the second quarter of this year, official data showed.

This confirms that although the economy is recovering, jobs are not being created, with the manufacturing sector hit by weaker global demand for exports.

Many economists have revised down growth forecasts for this year, but they are still closer to 3% than to the government's February budget estimate of 2,3% after last year's fall of 1,8%.

"Conditions remain dire for business as demand is still fragile," Investec economist Kgotso Radira said in a research note. "The outlook for both liquidations and insolvencies is moderately positive and further improvement will depend on the pace of recovery ."

The number of individuals and partnerships declared insolvent fell year on year for the fifth month in a row, but this was largely due to a high base last year during the recession, he said.

Ms Moolman says the downtrend in insolvencies is more convincing than the one in liquidations. "On the consumer side at this point it is clear that the worst is behind us," she said.

Article by: Mariam Isa - www.businessday.co.za