Mariam Isa
12 June 2008
Johannesburg — BUSINESS confidence slipped to a new seven-year low in the second quarter of this year, knocked by higher interest rates, rising food and fuel prices and attacks on foreign workers, a key survey showed yesterday.
The business confidence index (BCI) compiled by the Bureau for Economic Research (BER) dipped to 45 points, from 48 in the first quarter, adding to evidence that the economy is slowing sharply.
But the news is unlikely to deter the Reserve Bank from raising lending rates again when its policy meeting ends today, although it may back the case for a smaller hike than the full percentage point that markets expect.
Manufacturing data for April showed yesterday that output in the sector surged 7,5% after falling in March, but Statistics SA warned that a higher number of working days had distorted the figures.
"On balance, today's data reinforce our view that the economy is slowing significantly," said Citigroup economist Jean-Francois Mercier. "We do not think it is slowing sufficiently to prevent a further rise in interest rates, but we feel the case between a half and a full-point rate hike is more finely balanced than markets assume."
In the past few weeks, Bank Governor Tito Mboweni has repeatedly warned interest rates must rise further to counter the "second-round" effect of soaring inflation, which has breached its 3%-6% official target range for 13 months in a row. The measure, which excludes home loan costs, rose by an annual rate of 10,4% in April and is expected to climb higher.
But there are also mounting concerns about the toll that rising debt costs are taking on the economy, which grew by just 2,1% in the first quarter of this year -- a six-and-a-half-year low.
In that period the BCI, which is co-sponsored by Rand Merchant Bank, dropped by 19 index points -- its biggest quarterly fall in 24 years.
"The second-quarter BCI survey results indicate that growth momentum has not collapsed," the BER and RMB said in a joint statement.
"Nonetheless, its sharp swing into negative territory in the first two quarters does not bode well for economic growth this year and next."
A reading of 45 means that 55% of the survey's respondents are not satisfied with business conditions.
The BCI showed that confidence within the manufacturing sector -- which accounts for 16% of the economy -- fell nine points to 37 -- its lowest level in eight years.
That suggests the economy's second-biggest sector will remain under pressure this year despite the rand's depreciation, which makes exports more competitive.
But the fall in building contractor confidence was more disturbing, with the index diving 21 points to 47 -- a six-year low.
This was blamed on falling house prices, rising interest rates and delays in electricity certificates for new projects. The downturn could hamper activity in the broader construction sector, which includes architects and producers of building materials, and is growing more rapidly than any other part of the economy.
Retail confidence rose four points to 56, which was surprising given the effect on consumers of a cumulative 4,5-percentage-point rise in lending rates since June 2006. That has taken prime lending rates to 15%.
"When you look at data like this you get the feeling that today's rate hike might just be half a percentage point. But it's a toss-up," said Rudolf Gouws, RMB chief economist.
"The economy is weakening quite substantially. Overall growth will struggle to get over 4% this year or next year. Until such time as it's clear interest rates will start falling, the BCI index will edge further down."
SA's economy grew by an average annual rate of about 5% over each of the past four years, but the pace is expected to moderate this year in response to waning consumer demand and the effect of power constraints.
In the 32-year history of the BCI, confidence of about 40 index points coincided with full-year growth of between 3% and 3,5%, RMB and the BER said.
The second-quarter survey of more than 3000 companies was carried out between May 5 and 26. Official forecasts predict growth of 4% this year.
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