Improved business confidence shows the way forward

According to the latest Business Confidence Index (BCI) survey by Rand Merchant Bank (RMB) and the Bureau for Economic Research (BER) released in early September, the BCI for the third quarter of 2010 has rebounded to 47. This is an improvement from the first quarter, which reported a BCI of 43, and to the much lower BCI of 36 reported in the second quarter of 2010.

Says Adrian Goslett, CEO of RE/MAX of Southern Africa: “South Africa’s BCI has seen sharp and persistent declines from the heyday level of 85 reported in the third quarter of 2006, to the low 23 reported only three years later. The latest figure of 47 is the highest BCI level seen in over two and a half years, which indicates that although there is still a long way to go, sentiment is improving.”

The RMB/BER BCI covers the building, manufacturing, retail, wholesale and new vehicle trade sectors, and it rates the percentage of respondents in these sectors who think that prevailing business conditions are satisfactory. The index can vary anywhere between zero and 100 – zero being if all the participating respondents rated the prevailing business conditions as unsatisfactory, and 100 if they all rated it as satisfactory. The latest figure of 47 shows that almost half of the participants rated prevailing business conditions as agreeable.

“Looking at the survey, it is clear to see that confidence levels in the different sectors varied considerably,” says Goslett. At the top of the pile, new vehicle dealer confidence surged by a reading of 49 in the second quarter, to an impressive 79 in the third quarter – the highest it has been in four years. Retail confidence increased from 38 to 52, and wholesalers’ confidence improved from 47 to 50. Manufacturing confidence was also up, but only marginally, from 28 to 30, and building contractors recovered from 20 to 25.

“The rise in confidence in some sectors, such as the manufacturing, building and semi-durable retail sectors, was coupled with improved business activity. Other sectors on the other hand, such as the new vehicle, wholesale and durable goods retail trade, showed a rise in confidence even though there were weaker business activity levels experienced during the third quarter. In my opinion, the improved BCI figure was not just based on better bottom-line profits, but on a genuine confidence that business prospects are looking good going forward in the near-term,” says Goslett.

All good news he says, but it is clear that although the sun seems to be coming out, so to speak, there are still a number of hurdles that need to be overcome: “Although the BCI figure has improved, there are still a number of downside risks that are currently present, including the fact that global recovery is not yet fully established, and that the relatively strong rand could impact negatively on exports and economic growth.

“Concentrating specifically on property – the BCI figures do show a marginal upturn in real estate, even if it remains low. The tempo of the revival is currently constrained by factors such as uncertainty about economic prospects, high levels of consumer debt, a strained job market with high levels of unemployment, the sharp increase in electricity tariffs planned going forward, and of course, comparatively tight lending standards. Although these are much less restrictive than we have seen them in the not-too-distant past, they nevertheless still disqualify a substantial amount of willing marginal borrowers,” explains Goslett.

Going forward, Goslett says he is expecting even better, even if marginal, improvement in the fourth quarter and in 2011: “Although there has been improved confidence shown in the property market, which is reflected in the recent recovery in house prices, it is clear that we are not heading for a boom any time soon. There will be sure recovery in the housing market going forward, but it will be gradual and largely dependent on the income position of households. With regard to this particular point, the latest rate cut, which brought the lending rate down to 9,5%, the lowest it has been in 30 years, is an incredibly good sign going forward.”

Article from: www.remax.co.za