The Bureau for Economic Research (BER) reported on 9 September that South African business confidence improved in the third quarter – though remained very pessimistic.
By Lullu Krugel, chief economist for PwC Strategy Africa, and Dr Christie Viljoen, PwC Strategy& economist
After dropping to an all-time low of 5 in the second quarter, the Rand Merchant Bank (RMB)/BER Business Confidence Index (BCI) increased to a reading of 24 during 2020Q3.
On a scale of 0 to 100, with 50 the breakeven point between pessimism and optimism, the latest print remains amongst the worst readings see since the turn of the millennium. During the global financial crisis of 2008-2009, for example, the lowest reading was 25 (2009Q3).
The still-negative overall BCI reading for 2020Q3 is not surprising. Available economic data for the third quarter are less negative compared to Q2 – though still very bleak.
The IHS Markit South Africa Purchasing Managers Index (PMI) showed a smaller decline in private sector activity during July and August compared to the April-June period.
New vehicle sales declined by a mean of 28% in July and August compared to an average drop of 65,7% during the second quarter.
The weak state of the economy resulted in a 14,8% y-o-y decline in government revenue during July. By early- September, workplace activity was still 28% lower compared to the start of the year.
On a sub-index basis, retail confidence improved from a dismal 11 to 36 in the third quarter. This was only partly driven by a recovery in sales: by early-September, Google data shows that visits to retail and recreation spaces (for example, restaurants, cafés, shopping centres, theme parks, museums, libraries and cinemas) were still 7% below a benchmark period of January 3 – February 6.
Retail sentiment was lifted by expectations of improved sales towards year-end and continued cost-cutting. However, motor dealer confidence remained dismal at 16 points during the third quarter as new vehicle sales remained disappointingly weak.
In the secondary sector, manufacturing confidence turned around, rising from 6 in the second quarter to 22 in Q3.
Factory sector performance continues to be hampered by weak domestic and international demand as well as supply chain disruptions. Furthermore, temporary facility closures caused by both positive COVID-19 tests and power outages are weighing on output volumes.
The latest Absa Purchasing Managers’ Index (PMI) report found that, after recovering in May and June, factory production recovery stalled before finding some more momentum in August. However, while this has taken production levels back to pre-Covid-19 levels in some sectors, overall activity remained below pre-pandmic levels.
The BER commented that the survey for the third quarter BCI was conducted during August 12-31. This was immediately after President Cyril Ramaphosa announced a move to lockdown level 2, and ahead of the renewed onset of loadshedding. As such, business sentiment could well have deteriorated in September as power outages adversely affected the economy.
PwC estimates that the negative impact of loadshedding in 2020 will completely cancel out the positive impact created by interest rate cuts and payments under the Temporary Employer/Employee Relief Scheme (TERS). With this in mind, our baseline scenario is for the South African economy to contract by an average of 10.4% during the 2020 calendar year.