Business climate index reaches new high, as oil price collapses

Home Business Business climate index reaches new high, as oil price collapses

By Staff Reporter

WINDHOEK – The IJG Business Climate Monitor for December 2014 hit its third consecutive all-time high, as it expanded from 165.9 points to 166.6 points. The expansion in the index in the third quarter of 2014 was largely driven by a collapsing oil price and this trend continued in December.

During that month, the oil price fell by over 18 percent from U$71 to U$58 per barrel. This reflects a year-on-year decline of 46 percent, from U$108 per barrel in December 2013. According to the Institute for Public Policy Research (IPPR), which produces the Business Climate Monitor, the falling oil price caused the oil sub-index component of the overall index to spike from 88.3 in November to 103.1 in December.

“This spike largely underpins the overall move in the index, which would have been otherwise lower due to the remainder of indicators being flat or negative for the month. Notable in this regard were company registrations, down from 1 781 to 1,333 on account of seasonal factors; vehicle sales, down from 1 992 to 1 831 also due to seasonal factors and base effects; and the USD-ZAR exchange rate, down from 11.06 to 11.57 on account of temporary capital outflows from South Africa,” states the report.

“Despite these factors, the effect of the oil price slump eclipsed the contractions seen in other components of the overall index. Many of these contractions were seasonal and are expected to revert to mean or expand again through Q1 of 2015. Falling oil prices should have a sizeable positive effect on the local business climate, as lower oil prices translate into increased disposable income and by extension discretionary spending by consumers,” reads the report.

The IPPR added that at the same time, falling oil prices will lower the cost of production for companies or industries that are heavy oil users.
“Following unprecedented expansion in the IJG Business Climate Index to all-time highs in October, the consecutive two months have driven the index to further consecutive highs. Much of the overall move is down to oil prices, which declined by close to 50 percent in the second half of 2014. On a monthly basis, the investment sub-index and leading indicator contracted while the consumption and export sub-indices and the coincident indicator continued to expand despite a strong base created over recent months.

“On a quarterly basis, the export index contracted slightly as a weak exchange rate was unable to completely offset the negative impact of falling commodity and meat prices. However, on account of falling oil prices, the country’s terms of trade will have improved dramatically, providing some much needed respite for the embattled balance of payments and reserve position of the country,” says the report.