Manufacturing confidence remains subdued

RMB's Ettienne le Roux suggests that SA's manufacturing sector may already be in a recession. Image: NWU

The stable Rand Merchant Bank/ Bureau for Economic Research (RMB/BER) Business Confidence Index (BCI) reading of 41 points in both the first and second quarters means that close to 60% of respondents (all senior executives) remain unhappy with prevailing business conditions.

For the past year‚ the index has being moving sideways in negative territory. Weak business confidence implies that private sector employment and fixed investment will remain constrained.

The stable number hides substantial and worrying underlying changes‚ according to Rand Merchant Bank (RMB) Chief Economist Ettienne le Roux.

"Most concerning is that manufacturing confidence dropped from 41 to 25 index points over this period - its lowest level since the economic upswing started in 2009," he says.

"While the impact of electricity shortages‚ supply disruptions in the platinum sector and their spill-over effects to manufacturing cannot be denied‚ there is also a more fundamental problem in constrained consumer demand‚" says Le Roux.

Economy in recession?

"As such‚ the RMB/BER BCI remaining unchanged at a low 41 points may well reflect an economy already being in a technical recession, which is defined as two consecutive quarters of contraction in gross domestic product (GDP)," he adds.

A puzzling feature of the latest BCI is that while the ongoing strike in the platinum sector has adversely affected suppliers of chemicals and machinery as expected‚ it was not the only drag on manufacturing. Domestic sales of sectors with no link to platinum mines also weakened in the second quarter‚ as did export sales volumes.

"This is surprising given that the rand has not strengthened much since the previous survey and global growth has generally improved," Le Roux says.

He suggests that the abrupt fall in export sales could be linked to Eskom's rationing of electricity to energy-intensive manufacturers after the March power outage‚ as well as the fact that a large vehicle manufacturing plant has been shut due to retooling.

Other factors that could have affected business confidence during the second quarter include smaller non-mining strikes‚ the threat of industrial action in the metals and engineering sector‚ the large number of public holidays in April and the national election and subsequent cabinet appointments in May.

Building confidence dipped from the first to second quarters from 49 index points to 45. The mood also soured among wholesalers‚ from 47 to 44 index points‚ but confidence improved among retailers and new vehicle dealers‚ though it remained in net negative territory.

"If the services sector‚ coupled with agriculture and construction‚ more or less maintain their first quarter growth momentum‚ a return to more normal conditions in the platinum industry would give the economy a kicker in the second half of the year"‚ says Le Roux.

He believes that for the year as a whole real GDP should still expand by around 1.5% to 2%.