Business confidence update

At a reading of 29, the business confidence measure declined 11 index points from a level of 40 in Q1.17. Confidence was last this depressed during the great global led recession of 2008/09.

In Q2.17 pessimism was widespread, with confidence indices falling in all five of the underlying sectors and with all readings below the neutral level of 50 (see figure 1).

New vehicle dealers suffered the sharpest decrease in sentiment. This reflects expectations of even more conservative spending behavior on discretionary goods by consumers. The broader economic weakness is likely to also manifest in poor commercial vehicle sales.

The decline in retail sector confidence measured 10 index points, likely on expectations of further pressure on retail sales volume growth. Depressed consumer confidence, high unemployment, subdued credit extension and modest growth in disposable income are expected to affect consumers’ willingness and ability to spend. Consumer spending weakness also underpinned the 7 point drop in wholesaler confidence.

An expected deterioration in overall domestic demand impacted manufacturing sentiment which declined 11 index points. The comparative strength in the export market proved insufficient to offset domestic weakness.

The 6 point decline in building sector confidence was ascribed to a “sharp deterioration in business conditions for non-residential building contractors.”

The decline in confidence in Q2.17 reflects the perception that economic weakness will be prolonged and increases the risk that pessimism will become entrenched, further delaying a recovery in economic growth from the contraction of 0.7% quarter on quarter seasonally adjusted annualised in Q1.17.

Depressed business confidence reflects expectations of suppressed future economic growth which therefore indicates that the private business sector will not add jobs or boost investment at the present time. Private sector fixed investment already contracted by 6.0% y/y in 2016. The confidence impact of the recent political events and subsequent sovereign credit rating downgrades implies little scope for a recovery in private sector fixed investment, from this source, and therefore in potential GDP growth.

Business confidence update