Business Confidence improves from recession

Thursday, August 5, 2010

Pretoria - South Africa's Business Confidence Index (BCI) in July recorded the second highest reading this year at 84.3 points, the South African Chamber of Commerce and Industry (SACCI) said on Thursday.

The July figure of 84.3 points is 1.1 point above the July 2009 level following on June 2010's 84.8 points.

"The figure has improved from the recession but it is still not good enough at the moment," said SACCI economist Richard Downing of the BCI'S composite weighted index of 13 sub-indices that include new vehicle sales and merchandise import and export volumes.

According to the chamber, the month of July 2010 renewed focus away from the sentiment of the World Cup and returned it to the economic reality of a domestic economy struggling to gain momentum.

The global economy also reflected tensions as the pace of positive financial market developments outpaced a lagging real economy, SACCI said, adding that business confidence has yet to perceive strong and real economic prospects.

"If July 2010 is compared to June 2010 (month on month) five sub indices of the BCI were positive, four were negative and four remained neutral," said the chamber. Sub-indices of the volumes of merchandise exports as well as imports recorded a relative strong performance compared to previous months.

"The Soccer World Cup 2010 was an exceptional success and although it raised expectations during June 2010, a special effort is required to sustain the positive momentum and enhance the business outlook. Stronger domestic demand and stronger posturing in the international trade environment are necessary to promote sustained improvements in business confidence."

SACCI said that relative to July 2009, eight of the BCI sub-indices improved with real retail sales and building construction still lagging recent economic improvements. It said that increase in liquidations is a legacy of the recession and the period of exuberance before the recession.

"Higher real financing cost came about by default as inflation trended lower and nominal interest rates remained unchanged," said SACCI.

The volatility of the exchange rate at present it said is primarily a function of the global financial flow of funds rather than a current account phenomenon.

"South Africa's highly developed financial markets provide a comfortable platform for these flows to take place over the short term providing the potential for substantial returns. Leads and lags on proceeds or payments of global trade transactions also exaggerate the volatility of the rand exchange rate," explained SACCI.

It said though the present rand strength was causing some discomfort, the reasons for the strength should be looked at before ill- conceived policy on intervention is implemented thereby contributing to economic distortions with potential unintended consequences for the economy.