Kevin O'Grady

Economics Editor

BUSINESS confidence is rising towards record highs thanks to a favourable economic environment brought about by strong consumer demand, low inflation, the lowest interest rates in 24 years, and last month’s expansionary national budget.

The latest survey by the South African Chamber of Business (Sacob) showed the business confidence index ticking up to 126,9 last month — the highest level since the record of 130,9 set in September last year.

The favourable business conditions were accentuated by the release of the latest liquidations and insolvencies statistics by Statistics SA yesterday. The number of insolvencies plummeted 34,3% last year, compared with 2003, while there were 14,1% fewer liquidations.

Liquidations dropped 15,5% year on year in January to 328, of which 130 were of companies and 198 close corporations.

Sacob economist Richard Downing said the level of the index, which is based on indicators such as manufacturing production, inflation and retail sales, "may introduce a new run in business confidence".

Last month’s expansionary budget would be "good for demand and selling in the economy, on top of the high levels of spending from the private sector".

However, with excess demand giving rise to greater imports, Downing flagged the growing deficit on the current account of the balance of payments as something to watch. If portfolio capital inflows, which were financing the deficit, slackened or stopped, "a problematic situation could arise on a broad economic front".

A trade imbalance in favour of imports could weaken the rand, "and we know how sensitive inflation is to the strength of the rand", Downing said.

But economists were less certain that the rosy conditions in the economy will prevail. The Reuters Econometer, a poll of 15 economists released by the news agency yesterday, showed confidence in the economy slipping on expectations that the next move in interest rates will be up.

This is one of the things worrying the economists polled.

The confidence measure, drawn from forecasts for six weighted indicators for five quarters ahead, dipped to 240,43 last month, after edging up to 241,66 in January.

The economists believe high domestic demand, an expected weaker rand and volatile oil prices could add up to higher inflation, forcing the Reserve Bank to hike the repo rate by the first quarter of next year.

Seven of the economists polled see an increase in interest rates by the first quarter of next year, while four believe they will remain unchanged.

The poll produced forecasts for economic growth of 4,02% this year, 3,67% next year and 4,14% in 2007 — slower than government’s projections. With Reuters