SA Business Confidence 6yrs half-mast
2014-03-13
By itself it isn't so unusual that RMB/BER business confidence is now six years in negative territory (readings below 50%, meaning more than half of business people surveyed expressed lack of confidence reflecting poor or deteriorating business conditions).
After all, the period 1995-2001 had also recorded a six year gap in which business confidence recorded below 50%. And 1982-1988 also recorded a nearly similar stretch. Earlier history would likely show up more such stretches.
What made this latest stretch most unusual is its shape, and the driving forces, with apparently no end in sight. Those earlier stretches bookmarked the index between going below 50% in a rapid downswing in sentiment and business conditions and again breaking above 50% in a usually equally rapid upswing in sentiment and improving business conditions. This time has been different, and understanding its drivers a challenge. So though length of cyclical subsidence has not been an issue to-date (it will become increasingly so as the subsidence keeps extending), the shape of things certainly has been unique, with worrying pointers for what's to come.
Interestingly, the 2008 recession downswing in business confidence was by far the steepest uninterrupted one on record for the past five cycles these past 40 years, driven especially by building, motor, wholesale and manufacturing sentiment collapses. So 2008 events hit hard, as we all know. Surprisingly, the cyclical low point was also atypical, being higher than its precursors, with retail apparently the main circuit breaker. The consumer took much longer than usual to really lose its cool this past decade.
Once out of recession, the cycle recovered typically in 2009, though with qualifications, led by manufacturing inventory boosts, wholesale and motor trade. However, the building trades were completely missing from this recovery owing to a change in bank mortgage lending practices, which partly explained the remarkable motor trade revival (car buying remaining affordable and possible), and retail behaved totally atypical in both its downswing adjustment (arrested midway) and revival (very muted, effectively non-existent, initially hugging the 50% line).
If that initial 2009-2011 early cyclical recovery looked mostly normal, if qualified by (too many) atypical features, what followed after 2011 has been totally atypical (except in the building trades, offering its own interpretation challenge). For the cyclical recovery had by 2011 only reached halfway of a full cyclical upswing. The upswing now became arrested, effectively subsiding anew through early 2014, with this profile strongly present in manufacturing and retail, both now hugging the 40% confidence line, with today 6-in-10 business managers expressing a lack of confidence.
In contrast, wholesale shows a step-like cyclical upswing through early 2014, though with apparent resets (to abrupt lower levels) in mid-2011 and mid-2013 (possibly coinciding with major strikes), effectively by now still stuck at the 50% line.
Motor trade is atypical in that it peaked out in normal high cyclical territory in 2011 (the only sector to do so) and has since unexpectedly descended into full-fledged recessionary collapse. The building trade upswing came after a four year hiatus of moving sideways at trough levels, without much of a recovery noticeable in building demand, but with supply subject to recession shrinkage through contractor bankruptcy or simply leaving the trade, with surviving builders experiencing less competition and therefore an improvement in business conditions and survival chances.
The good news here is that the supply side survivors are powering the first stage cyclical recovery to 50% confidence. The bad news may be that anemic demand will stay anemic for longer through 2014-2015, capping building confidence in the 50s range rather than allow a full cyclical recovery to proceed into the 70s or even 80s. The building trade prognosis for 2014-2015 looks only modest, when going by consumer income and credit trends.
Motor and retail are tracing out cyclical interruptions due to repressed household income gains as per minimal job gains, higher inflation erosion, constrained credit access and slow overall income gains. Manufacturing is likely to keep struggling domestically, with no inventory bounce to feed it, constrained household consumption and fixed investment repressed as the private sector takes a low view of business prospects, preferring to focus on higher growth opportunities elsewhere. Manufacturing exports may lift as global growth proceeds and the weak Rand assists, but this may not be enough to decisively overcome domestic weakness.
Wholesale trade will likely also remain mired, and favour lower rebasing with every new major strike (heavy industry potentially next from mid-2014?). Adding it all up, business confidence five years into cyclical recovery remains marooned at the 40% level, with component prospects offering little succour of an upside break in 2014-2015, greatly extending the period of cyclical stagnation behaviour. Increasingly, this period (2009-2015) should be typified as the Great Becalming, marked by minimal growth, at least in the key private sectors as surveyed for business confidence purposes, these being generally lead indicators for cyclical turning points.
It is at this stage not clear what will lift the mood decisively, as external windfalls or self-made infrastructure construction booms may still take years arriving. As to any breaks to the downside, heralding generalized recession, the motor trade cyclical behaviour since its 2008 trough may have looked normal but was actually pretty artificial, considering the leg-up offered by building trade adversity.
The general prospect may not deteriorate enough to trigger an overall recession, especially if global recovery were to continue (if gradually), macro policy (fiscal, monetary) remains mostly supportive, with the Rand strongly supportive.
So business confidence marooned in the 40s and GDP growth around 2% seems to be the main prospect through 2015 or even beyond.
Cees Bruggemans
Consulting Economist
Bruggemans & Associates
Website www.bruggemans.co.za
Email economics@bruggemans.co.za
Twitter @ceesbruggemans