Increase of 1.9 points in the Business Confidence Indicator

The MCCI released its Business Confidence Indicator for the 2nd quarter of 2019 on Thursday 15th of August 2019.

Based on quarterly business survey conducted between the 1st and 26th of July 2019 with a sample of economic operators representative of the sectors of the Mauritian economy, we observe that the business confidence indicator improved modestly at 1.9 balance points. In the same quarter of 2018, the indicator improved by 8.2 balance points.

Indeed, according to the latest tendency survey, the indicator has entered the ‘Upswing/Recovery’ quadrant in the second quarter of 2019 – a leftward move in the business cycle. In fact, the assessment of the current situation by operators, for the second quarter of 2019, was slightly negative at -0.4 points. The decrease in the evaluation of entrepreneurs on the economic situation between the months of April and June 2019 has been enhanced by a higher expectation on the economic outlook for the months of July to September of 2019 at 6.6 balance points.

Analysis by sector of activity
We notice that business confidence remains driven by the commerce sector, with an increase of 6.9 balance points, reflecting continued improvements in household purchasing power and expenditure levels, with an increase in consumption expenditure, according to Statistics Mauritius of 3.3 percent in 2019, as well as noted increase in investment by operators involved in the Commerce Sector. Business confidence in the services sector improved by 3.0 points, but is affected by number of varying factors in second quarter of 2019, on the back of international uncertainties and challenges to the economic landscape. On tourism arrivals, after a decrease in tourist arrivals in the first quarter of the year, there has been a modest pick-up of 2.5 percent in the months April to June 2019. Indeed, a number of our major tourist markets – including France, Reunion Island and the United Kingdom, which showed declines in tourist arrivals in the first quarter of the year have shown a pick-up in arrivals. Nonetheless, there have been noteworthy decreases in tourism arrivals from China and India over the second quarter of the year. On the whole, initial projections of operators for the three months – July to September 2019 are fairly positive with the impact of Summer Holidays in Europe as well as ad-hoc MICE tourism arrivals from the region linked with the Indian Ocean Island Games.

On the financial services sector, there has been a modest increase of approximately 4 percent in the number of global business licences over the first six months of the year, with a higher number of new GBCs in the second quarter of 2019. The sector continues to be faced with on-going challenges linked to the adjustment phase of companies following the phasing out of the grand-fathering agreement on the Indian DTAA. There is furthermore a need to continuously engage in a strong marketing and communications on the substance of the sector and its role in the economic development in order to avoid any misperceptions related to the financial services sector.

We notice a decrease in confidence level in the industrial sector by 6.7 points. The turnover of operators in the second quarter of 2019 has continued to decrease slightly as compared to the same quarter of 2018, whilst expectations for the third quarter of 2019 figures have decreased similarly. The industrial sector remains largely affected by the continued slowing down of economic dynamism in the country’s main export markets, as well as uncertainties and potential market disruptions linked to the global trading environment. Manufacturing activities are particularly faced with fierce competition at exports whilst the domestically oriented industries face higher pressures from imported goods.

Analysis by size of workforce
An analysis by size of the workforce of companies shows that larger sized businesses continue to lead business confidence, with an increase of 1.8 balance points. There has been a slight improvement in small enterprises’ confidence level, at 1.3 balance points while we notice a modest weakening of 0.6 points for medium-sized companies, with a decline in turnover levels in the second quarter of 2019. The current situation is reflective of challenges faced by enterprises in certain sectors in sustaining profitability and employment in times of challenging and unpredictable global economic environment.

Economic Growth in 2019
According to Statistics Mauritius official data, for the second quarter of 2019, we had a year-on-year increase in GDP of 3.3%, which is lower than the 4.1 percent achieved in the corresponding first quarter of 2018. This is in line with our predictions on the first quarter of 2019, which points to a slower growth as compared to 2018.

Based on our econometric model, and trend analysis of business tendency, we estimate a year-on-year growth rate of 3.6 percent for the second quarter of 2019, similar to the 2018 figures. Our initial estimates, based on preliminary expectations of operators, and our econometric modelling, show that economic growth in 2019 should be of 3.9 percent.

Factors affecting business confidence
Demand remains one of the key engines of growth in the Mauritian economy, with more than 34 percent of entrepreneurs indicating that an increase in demand has been one of the most significant factors affecting their businesses. Indeed, enhanced purchasing power policies continues to have a positive effect on consumption expenditure, with household consumption expenditure expected to grow by 3.3 percent in 2019 – similar to 2018. Entrepreneurs particularly in the consumer goods segments have indicated an increase in demand. Nonetheless, the percentage of entrepreneurs indicating an increase in demand as the most significant factor affecting their businesses has decreased, on the back of a slowdown in global demand linked to global trade tensions and an expected slowdown in global economic growth.

It is further noted that approximately 32 percent of entrepreneurs have indicated that their strategies for diversification of products and the tapping into new markets have contributed positively to their business performance during the first quarter of 2019 whilst 14 percent of enterprises believe that a favourable competition in the marketplace has positively affected their business performance.

Nonetheless, some 23 percent of entrepreneurs have indicated a decrease in the demand for their products, mostly accompanied by higher levels of competition in the marketplace. Indeed, with a highly liberalised economy, and faced by global competitiveness both on the domestic and external markets, entrepreneurs, at 42 percent point to an increase in competition as one of the constraining factors affecting their businesses. Heightened competition is a trend which has been observed over the last few quarters and reflect a global economic environment which is more volatile.

Moreover, we notice that the cost of doing business is now consistently showing itself amongst the main factors affecting business performances, with more than 12 percent of companies pointing to the latter as one of the negative factors affecting performance in enterprises. Some 14 percent of respondents, mainly in the commerce sector, pointed to an unfavourable monetary and exchange rate policy as a factor affecting their business performance.

Investment in 2019
Private investment remains positive with 61 percent of entrepreneurs indicating that they would increase their investment expenditure in the upcoming twelve months, both locally and abroad. This is in contrast to some 30 percent of entrepreneurs anticipating a stagnation in investment expenditure and the remainder of companies pointing to a decrease in investment. Recent measures to boost productive investment such as the LEMS Schemes as well as the 0.15 percent decrease in the Key Repo Rate (KRR) on Friday 9th of August 2019 shall act as signalling effects towards pro-investment decisions by enterprises. Nonetheless, investment decisions by entrepreneurs on new projects are likely to be affected by a prudent policy with the electoral cycle expected to be completed within the upcoming six months.

The proportion of investment in R&D expenditure remains modest. Investment remains predominantly in Plant & Machinery, indicating that entrepreneurs are investing in renewing their production lines. Indeed, more than 51 percent of entrepreneurs have indicated that their investment shall be in Plant & Machinery, whilst 22 percent indicated investments predominantly in Buildings.

Employment in 2019
Employment is expected to continue to improve, albeit modestly, with 24 percent of entrepreneurs indicating an increase in employment over the next 3 months. The majority of enterprises are expecting to maintain their employment levels whilst some 7 percent of companies are engaged in a restructuring and downsizing exercise and thus decreasing their employment levels.

More than 16 percent of companies maintain to an increase in global and local demand as the main reason for their employment policies, a figure which is halfm of the percentage achieved in the first quarter of 2019. Conversely, some 38 percent of companies are either in an expansion or diversification phase, a rising trend observed since mid-2018. On the downside, some 10 percent of enterprises are in a restructuring phase in order to maximise the use of their workforce and mitigate the cost of production. A number of companies (some 15 percent) are either experiencing recruitment difficulties or faced with labour market rigidities. The streamlining of procedures for employment of both Mauritian and foreign workers, addressing the skills mismatch through targeted training and education, and the targeted opening up of the economy to foreign talents, remains primordial for the development of the economy.

CES Ifo World Economic Indicator 2nd Quarter 2019
According to the latest survey conducted by the CESIfo Institute, the global economic climate remained negative in the second quarter of 2019, at -2.4 percent.

This analysis is in harmony with the latest forecasts by international institutions. The IMF confirms in its latest publication that global economic activity is weaker than anticipated, with subdued investment and demand for consumer durables as global trade remains sluggish. The IMF favours a macro-economic scenario where the global growth rate, as measured by GDP, to increase by 3.2 percent in 2019. It has further reduced its global growth forecasts for 2019 by 0.5 percentage points below its October projections.

Intensified US-China trade and technology tensions as well as uncertainty on Brexit have affected the global growth forecast. Despite certain upside surprises in headline GDP for some countries, data point to subdued global final demand combined with a slowdown in global manufacturing activity reflecting weak business spending and consumer purchase of durable goods. These developments suggest that firms and households continue to hold back on long-range spending amid elevated policy uncertainty.

Growth in the world economy is thus expected to remain sluggish, with threats to the global technology supply chains, Brexit-related uncertainties and rising geopolitical tensions roiling energy prices. Risks to the forecast remain on the downside. Indeed, the IMF points to possible further trade and technology tensions which will inevitably dent sentiment and slow investment. This is combined with a protracted increase in risk aversion and mounting disinflationary pressures that may increase debt service difficulties.

The global economy shall further be affected by the effects of a potential “no-deal” withdrawal of the United Kingdom from the European Union and the effects of trade tensions between Japan and Korea, and a yet unanticipated announcement, at the end of July 2019, of further hikes in tariffs worth USD 300 BN by the United States with respect to Chinese products. It is now clear that economic growth and expansion has decelerated significantly with a combination of subdued demand and uncertainties leading to weaker than expected activity in major economies.

According to the IMF, the main policy priority is for countries to take actions to reduce trade and technology tensions and expeditiously resolve uncertainty around trade agreements. Countries need to further conduct accommodative monetary policy in order to combat subdued final demand and muted inflation. Fiscal policy should focus on smoothing demand and protecting the vulnerable whilst ensuring that growth potential is bolstered through structural reforms. At the same time, economies need to ensure that they keep a sustainable public finance over the medium term.

MCCI BCI Second Quarter 2019 FINAL
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