Business confidence drops

Johannesburg - The Rand Merchant Bank/Bureau of Economic Research Business Confidence index (BCI) dropped during the second quarter of 2010 to a level of 36.

This followed a surge by 20 index points over the course of just two quarters - from a low of 23 during the third quarter of last year to 43 during the first quarter of 2010.

The index can vary between zero and 100, where zero indicates an extreme lack of confidence, 50 neutrality and 100 extreme levels of confidence.

While the drop was disappointing, it was not entirely unexpected as it followed the largest improvement in sentiment between consecutive quarters in 15 years, RMB chief economist Ettienne le Roux said in a statement.

"The second-quarter decline can therefore be partly attributed to confidence merely returning to more realistic levels."

Confidence slipped in all five sectors which make up the index.

The largest declines occurred in the retail and motor trade sectors, the same ones which saw the strongest swell in confidence  in recent quarters.

In the retail sector, nearly all of the 16-point gain since the third quarter of 2009 was lost, as confidence dropped 13 points to 38 during the second quarter of 2010.

"Declines were particularly notable in the case of the durable [furniture, appliances and electronic goods] and semi-durable [clothing and footwear] goods sectors. The confidence of dealers in food and groceries eased to a lesser extent," Le Roux said.

Confidence in new vehicle trade tumbled from a high 60 to a neutral level of 49 in the second quarter.

"Confidence fell not because sales performed poorly - they actually were at a four-year high during the second quarter - but rather because dealers are beginning to doubt whether the current strong growth in sales can last."

The second quarter brought no relief to the two laggards, the building and manufacturing sectors.

Confidence in the building sector slipped further from an already low 26 to 20 index points, while the business mood in manufacturing largely remained unchanged at 27, compared to the previous 28 .

"Both building contractors and manufacturers rated insufficient domestic demand as the biggest constraint they face. Weaker export demand also played a role in the case of certain manufacturers."

Le Roux said the latest results were sobering, a reminder that a growth in business confidence would at times be interrupted.

The second quarter had turned out to be such an event, similar to what happened in 1978 and 2000 when the index reached the mid-40s.

"In retrospect, the latest survey results would seem to indicate that initial expectations of a further sharp acceleration in real economic activity were misplaced, with confidence now merely having returned to levels which better reflect actual underlying growth trends."

Although economic growth accelerated strongly during the first quarter of 2010, the 4.6% annualised rate was unlikely to have been sustained.

"However, while the recovery is not yet deeply grounded and widespread, it would be wrong to take the 7-point decline in confidence as indicative of a prospective slump in real output", Le Roux said.

 - Sapa