The pick-up in economic growth and better overall conditions in the business environment had a somewhat positive effect on the ABSA SME index which increased with 2.1% from the second quarter to the third quarter. But the actual index is still below the levels of last year as the weak economy at the start of the year is still having an effect on the performance of entrepreneurs in the country.
The ABSA SME index is at 94.9 points, 2 full points up from the April quarter’s 92.9. The drop of 0.6% over a year is also the smallest drop this year on a year ago basis.
The fastest GDP growth in 2014 also resulted in the best growth in the ABSA SME index. While industrial action hampered business activity as all business confidence indicators were well below levels that would be considered normal earlier this year, the fact that growth is at least on an upward trend again help’s SME growth too.
Many business indicators are showing improvement and while indicators such as retail sales are positive and car sales are flat - the fact is that the negative effects of industrial action are slowly being left behind. This is by no means an easy time but it is certainly better than the first half of 2014.
The decline in the fuel price and the rise in electricity costs seem to be cancelling each other out – so businesses are feeling a little less price pressure as the PPI rate has also slowed down. However in the bigger picture we are not out of the woods yet.
The two main components of the ABSA SME Index show that it is particularly the self-employed who are still not recovering as well as slightly bigger entrepreneurs. One is concerned that the micro businesses in South Africa are in effect just stagnating.
The prerecession levels have not been reached in six years and at current levels will probably take another two years to get to those levels again. But a recovery is a recovery and the effect of entrepreneurs who employ others is very positive this quarter and is the best in nearly two years. This dynamic effect of a little better economic growth and more employers is positive news in an otherwise depressing year for SME’s.
While this can change fast the fact is the actual levels of business activity are still far below normal but it is moving in the right direction. The worst is hopefully over in the shaping of the entrepreneur landscape.
The number of self-employed remains low but does not drop further.
Rising interest rates, industrial action and protests that destroyed small stall entrepreneurs have resulted in the self-employed remaining at a decade low of 1 233 000 in the third quarter. There is however no further drop and more importantly the self-employed are going to take longer to recover so any halt in the downward trend would in itself be a trend change.
In 2005 there were 1 693 000 self-employed South Africans according to the Survey of employers and self-employed while according to the October Household Survey in 1999 there were over 1.4 million self-employed adults and they represented 17% of all those in work.
In 2008, 9% of all employed were self-employed, which increased to 9.4% in 2010 – before dropping to just 8.2% now. The average percentage of the self-employed over the last four quarters was 8.2% of all those employed – the same as in the 2nd quarter.
The last six quarters with high levels of industrial action has seen over 150 thousand self-employed disappear from the South African economic landscape. This remains one of the fastest and most dramatic shifts yet in the number of self-employed.
The entrepreneurial school – sometimes called the school of hard knocks of self-employment - is now at half the levels it was before which could spell trouble in the future when South Africa needs to grow employers to help with the massive employment creation that South Africa needs and wants according to the National Development Plan (NDP).
As a country we still need the self-employed and they do still form the basis of the ABSA SME index and particularly its future.
The ABSA SME employer numbers increase.
The number of employers in the South African economy increased with twenty two thousand over the last quarter from the second quarter of 2014. On a year ago basis the percentage increase was 2% reflecting recovery conditions in the economy which meant an increase of just fourteen thousand employers.
In the last nine quarters the number of employers has been between 750 000 and 800 000. So the 776 000 number is perhaps an indication of more normal operating conditions in the small to medium enterprise sector compared to the negative conditions in the micro or self-employed sector.
Employer numbers are also still well below the 825 000 before the great recession hit South Africa. This in essence means that employer numbers are still about 7% below their pre-recession levels. But importantly the employers in South Africa seem much more resilient over the last two years or so and this probably does help the economy when employer numbers become more stable.
As indicated last quarter, when industrial action quietens down and economic growth picks up again - employers do return to the economy. While the employer numbers remain far off their lows, the time needed to rebuild the employers that the country has lost in these difficult and challenging times may still take a while.
Forecasting where both employers and the self-employed number could be in the next few years.
At present South African growth prospects have declined somewhat and the average growth rate for 2014 is now estimated to be 1.4% by the IMF and the Treasury. Over the next few years we are likely to see growth of around 2.5% according to consensus from economists forecasting polls.
It seems that even official forecasts see the growth of the South African economy only reaching 3% in 2017 and by most accounts the power shortages will present South Africans with lots of down side risks to growth forecasts.
But the effect on entrepreneurship is what we want to look at in this quarter’s theme.
It is clear that this is a bit of a “chicken or the egg” situation as the economy needs SME to grow but the SME need growth to be successful. But over the last six years the ABSA SME index has shown us that the self-employed entrepreneurs follow the ebb and the flow of the country’s economic growth.
In the first half of 2014 when growth was weak and in 2009’s decline in the economy, Self-employment numbers declined drastically and only really started to improve when growth reached over 2% and then did much better after growth increased to around 3%.
Employer numbers are more stable in the short downturns but in the bigger economic downturns the number of employers also declined. Employers also do not increase as much with higher growth rates perhaps because they are then more careful or they rather let smaller firms take the risks.
Forecasting the number of employers and the self-employed as laid out in the normal ABSA SME index is not an exact science but perhaps the slight change in trends will help us understand the inter play between the economy and entrepreneurship.
Firstly we have created three different simple scenarios for economic growth which over the five year period remains constant at three different growth rates. Those growth rates are 1.5%, 2.5% and 3.5% respectively as shown in Table 1 above.
In the lowest growth rate scenario the self-employed numbers are weakest and show only a total improvement of 5.1% over the 5 years. It seems these micro firms do not react well to limited growth prospects and then grow below the actual GDP rates for the whole period.
The Employers in this low growth scenario grow slightly better but still only increase with about 6%. It does seem from the limited data that we have on a quarterly basis that bigger firms are more likely to make use of opportunities presented by the economy.
In the medium growth scenario the Self-employed outperform the employers by a small margin. This difference is only 0.5% between the total growth of employers and the self-employed and actually the most likely scenario of 2.5% growth over the next five years sees both grow at around 10%.
A sustained growth of 3.5% unsurprising by its very nature shows the best growth for both employers and self-employed entrepreneurs. Employers are forecast to grow with 14% over the five year period which is below the actual economic growth rate.
The self-employed actually grow with nearly 17% in the higher growth scenario. This would indicate that better growth in the economy is more beneficial to those who are micro businesses seeking out a living and perhaps says much about the subsistence culture of many of our self-employed.
Employers seem a little more conservative in situations of higher growth but that is perhaps also understandable as many in the formal sector are concerned about the effects of laws and red tape.
Perhaps it also indicates that employers are using some of their South African earnings to broaden their reach into countries around us who are seen to be offering good growth potential and outcomes over the next decade.
While these forecasts are based on only six and a half years of data they do indicate that economic growth is also needed to underpin entrepreneurship and the market spirit. Of course the businessman or woman also play a role in creating that growth and that is why other factors such as infrastructure and clear, simple and fair rules are needed for business to do its job of creating profits and job opportunities.
These confidence measures are fundamental to help underpin both employment growth and wealth creation in a relative market economy where the state also plays a big role.