Johannesburg - Business confidence in South Africa has been hit on fears of insufficient stimulus to sustain momentum in the recovery, with some economists saying this builds a case to keep rates on hold in 2010.
"Expectations of a weak growth outlook are likely to become more entrenched as more of this kind of data unfolds. This again strengthens the argument for keeping rates on hold well into 2010," said ETM managing director and economist George Glynos.
The index, which is compiled by the South African Chamber of Commerce and Industry (Sacci), is a monthly gauge of business confidence in the economy. It is put together by following a number of key indicators in business conditions.
October's index reading reflects a deterioration in confidence to 82.2, compared to 85.5 in September.
Glynos said the breakdown shows 9 out of the 13 categories of the index were negative.
"Although it is off its recent lows, the data remain at the low end of the scale and would be another economic indicator which highlights the tentative nature of the global and local economic recovery," he said.
With confidence remaining fragile, Brait economist Colen Garrow said there's only one word for it: "Recession".
"The consumption side of the economy remains depressed, especially vehicle and retail sales.
"Jobless economic recoveries are a rare phenomenon. Only when the labour market improves can there be some improvement in confidence indices," he said.
"While the impact of the rand is positive, the side-effect it has on manufacturing isn't considered good at all. Not surprising, when a sector as large as manufacturing moves in the same direction as GDP [gross domestic product] growth."
Sacci said the SA economy wasn't being stimulated by international markets, adding that one of South Africa's biggest trading partners - the US - is giving off mixed signals about its economic recovery.
"The Dow Jones Industrials Index suffered its worst slide in over three months at the end of October, on concerns that the US economic recovery will not be strong enough to support a recent seven-month share price rally," said Sacci.
Economic activity still lagging
"This followed a day after official data indicated that the US economy was growing again in the third quarter of 2009."
Economic improvement fuelled by government cash injections is not sustainable, according to Sacci.
"With data releases showing that consumer spending fell in September 2009, economic debate on the underlying thrust in the US economy has been sparked. However, the manufacturing sector revival appears unaffected as inventory rebuilding is continuing."
Meanwhile, Sacci CEO Neren Rau said the extent of short-term improvements in the sub-indices is not enough to move the business confidence index onto a clear positive trajectory.
"Most economic activity is still below long-term trend lines," said Rau, adding that the lowest point may have been reached.
Annabel Bishop, chief economist at Investec, said she sees economic growth of 2.4% quarter-on-quarter in the first quarter of 2010. She forecasts 3.4% growth in the second quarter of 2010.
"Economic recovery is expected to be slow and not necessarily steady in 2010, which will keep tax revenues constrained and the budget deficit and borrowings high.
"Even in 2011, growth is not expected to be above 3.4% year-on-year, as global demand remains below trend and the loss of jobs and companies in the recession takes time to recoup."
Bishop expects no further interest rate cuts, particularly with the rand's weakness and excessive mooted electricity tariff hikes.
- Fin24.com