Business confidence slumps to 21-year low

Business confidence fell to a 21-year low at the start of 2020, as weak demand, power cuts, deteriorating government finances and the spread of the coronavirus hurt sentiment.

As growth prospects deteriorate in the wake of the virus, as well as domestic issues such intensified load-shedding, economists argue the SA Reserve Bank has more room to cut interest rates at its meeting next week.

The latest RMB/BER business confidence index released on Wednesday slumped to 18 points in the first quarter of 2020, according to RMB.

This is the lowest level since the second quarter of 1999, but the situation could worsen, according to RMB chief economist Ettienne le Roux as the prospective economic slowdown from the Covid-19 virus sets in.

The most immediate effect will come through global trade channels with SA exports and imports being hit,  interruptions to supply chains and damage to other sectors such as declining tourism flows, Le Roux said.

“It will get worse the longer the virus persists,” he said.

The business confidence index surveys 1,800 respondents across five sectors — manufacturers, building contractors, retailers, wholesalers and new vehicles dealers.

The index’s neutral mark is 50, with a reading below that deemed to be negative. The most recent result means that more than 80% of respondents, surveyed between February 12 and March 2, believe business conditions to be unsatisfactory.

The index is not far off its lowest level of 12 points, reached during the 1980s at the height of political instability in SA, and for a period in the late 1990s when the prime interest rates shot to about 23%, said Le Roux.

Though the government had no fiscal space to provide stimulus to the economy,  Le Roux said support could be offered by the central bank, which is due to make a decision on interest rates next week.  

“To the extent that the central bank can lower interest rates under these kinds of conditions, that is where some support and stimulus will be forthcoming,” he said.

The Bank would have to review its  growth and inflation forecasts, he argued, “and that will determine what their next move will be”. 

The Bank is expected to make these revisions as a host of financial institutions re-evaluate their forecasts.

Banking group BNP Paribas said in a note on Wednesday it is expecting SA’s economy to contract by 0.2% in 2020 in the wake of continued domestic power cuts and what it sees as a looming global recession.

Alongside pressure on growth, as well as lower expectations for inflation, the Bank is likely to feel “growing pressure to cut [rates] amid co-ordinated global policy support”,  said Jeffrey Schultz, senior economist at BNP Paribas SA.

BNP Paribas is forecasting cuts of 75 basis points in March, May and July, taking the repo rate to 5.5%.

donnellyl@businesslive.co.za