Business confidence edges up

06 July 2011 - 01:45
By Evan Pickworth

Business confidence is tentatively up but the economic recovery continues to be of the muddle-through variety, with consumption spending and fixed capital formation particularly troubling.

Business confidence, as measured by the SA Chamber of Commerce and Industry index, improved by one point to 86.8 last month.

"The driving force behind the current performance is fragile because the basis for current high household spending is difficult to reconcile with employment levels and low credit extension," said chamber analysts in their latest report.

The chamber is concerned that, since the upward phase of the business cycle started in September 2009 (as identified by the Reserve Bank), fixed investment by both the public and the private sectors has declined.

Reserve Bank data show that the ratio of gross fixed capital formation to GDP was down to only18.70% in the first quarter of this year from 23% in mid-2009.

The Bank said in its annual economic report last week that all components of domestic expenditure were rising and boosting growth.

Final consumption expenditure, by households in particular, has been the major driving force in the country's recovery from an aggregate demand perspective, according to the report.

The country recovered from a recession in 2009 and recently posted annualised growth rates of more than 4 % in the final quarter of 2010 and the first quarter of 2011.

Though confidence continues to be affected by a tentative economic climate, as reflected by a slight downward trend in 2011, the confidence index averaged 86.9 in the first half of 2011 compared with 82.8 in the first half of 2010.

The chamber's analysts note that this improvement should be viewed in the context of a weak performance in the first half of 2010.

"The sustainability of the present consumption spending patterns [private and public sector] is dubious and may contribute to a false sense of improved business confidence."

Yesterday's data showed that five of the 13 sub-indices fell between May and June, and one sub-index remained neutral.

The year-on-year changes indicate that the strength of economic improvement remains weak, with major sectors failing to demonstrate sustainable performance.

Manufacturing and construction continued to show a lack of direction, and import volumes also reflect tentative domestic circumstances. - I-Net Bridge