South Africa economic environment for SMEs, October 2016 - Blog

South Africa economic environment for SMEs, October 2016

South Africa economic environment for SMEs, October 2016

There hasn’t been much to celebrate about the South African economy in 2016. While the Gross Domestic Product grew 3.3%, annualised, in the second quarter of 2016, this followed a contraction in GDP in the first quarter.


This is in keeping with generally poor rates of economic growth posted over the last 5 years: 3.2% in 2011; 2.2% in 2012 and 2013; 1.6% in 2014; and 1.3% in 2016. The South African Reserve Bank’s Monetary Policy Committee does not expect the growth seen in the second quarter of 2016 to continue into the third quarter of this year.


Real salaries are in decline


Real take-home salaries declined by -0.4% in the first 8 months of 2016 – this is an inflation adjusted measure. Inflation-adjusted measures of disposable incomes – a measure of particular interest to businesses that operate outside of the essential goods and services sectors – declined even further thanks to inflationary pressures, with the annualised decrease being -2.5%, according to BankservAfrica’s Disposable Salary Index.


Inflation pressures South African consumers


Inflationary pressures have plagued South African consumers in the last year. With salaries not keeping pace with inflation, and inflation being particularly noticeable in basic foodstuffs (thanks, in part, to low yields due to drought), South African’s are having to resort to further belt-tightening, hoping that their belts have enough notches left. Inflation in 2016 averages 5.9%, up from 4.6% in 2015; increases in real personal income tax and medical insurance in this period were above inflation, and add further pressures on South Africans.


This pressured economic environment is troubling for South African small businesses. Not only does it mean that they will have to work harder and smarter at attracting local clients towards their businesses, but it also means that inflationary increases to their own costs-of-living will add external pressures to their operations.


Credit growth slows


Peter Montalto, economist at Nemura, reports that credit growth is slowing down. This is especially so in corporate lending, a traditionally strong area of financial services in South Africa. He anticipates a slow-down in domestic private investment growth, and stagnation in labour market growth. This does not augur well for small businesses hoping to pivot or pursue expansion.


Business owners still feel optimistic


There is some good news, however. The Civil Confidence Index, compiled by First National Bank and the University of Stellenbosch’s Bureau of Economic Research, reports from their sample that there was an increased confidence in the business environment. This is largely driven by continued growth and activity in the construction sector, despite the real value growth in this sector slowing to 0.2% in the second quarter of 2016 (annualised), a drop from 4.6% growth in the first quarter of this year. Despite reports of increased confidence, businesses are reporting strain from lower demand for new work, indicating that this boost in business environment confidence may not last.


Political instability causes uncertainty


Continued turmoil between branches of government, in particular between the Executive Branch and Treasury, has done little to boost investor confidence in the health of South Africa’s economy. It is too early to tell whether the results of the municipal elections earlier in 2016, which did not favour the ruling ANC, will produce a governance wake-up call to the party. If the government can respond positively to robust political challenge, South Africa’s economy may well post signs of recovery and sustained growth – if it cannot do so, and continues to govern erratically, then the economy will suffer. And where the economy suffers, small business suffers too.