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Business confidence was down again in the second quarter of the year, weighed down by load shedding and pressure on profitability, to reach the lowest level of confidence since 2020.
Only about a quarter of respondents in a survey were satisfied with prevailing business conditions.
The RMB/BER Business Confidence Index (BCI) declined for a fifth consecutive quarter to reach 27 in the second quarter of 2023, down by 9 points from 36 in the first quarter. This decline in confidence came on the back of another decrease in business activity, although this likely does not explain the full extent of the deterioration in sentiment.
The report on the index also points a finger at the challenging business environment at other factors such as persistent load shedding, rising interest rates and cost pressures weighing on profitability that also affected confidence.
The BER conducted the second quarter survey between 10 and 30 May 2023 among 1 050 senior executives in the building, manufacturing, retail, wholesale and motor trade sectors.
The respondents shared the gloomy sentiment, with three of the five sectors seeing their confidence level decline, while the other two remained unchanged. The consumer-facing new vehicle dealers and retail sector experienced the most notable deteriorations in confidence.
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New vehicle dealer confidence plunged by 21 points to 23, while retail confidence declined by 14 points to 20, reflecting increased pressure on profitability and a worsening of business conditions for retailers.
Traders in non-durable goods, such as food and beverages, struggled the most amid a steep decline in sales volumes, while semi-durable goods, including clothing, retailers saw a slight uptick in volume growth.
Trends diverged in the durable goods sector with hardware traders under pressure, but on the other hand furniture and appliance sales were supported by load shedding essentials and replacement purchases of electronics that broke due to load shedding and power surges.
Wholesale traders were the third sector where business confidence declined by 8 to 32 index points as sales volumes of consumer goods were under more pressure. Like most other sectors, the wholesale confidence level is well below its long-term average level, the BER says.
Respondents in the manufacturing sector remained the most downbeat with confidence staying at 17 index points. This means that less than two out of 10 businesspeople in the sector were satisfied with prevailing business conditions. This sector continues to be plagued by load shedding, which also presents an additional cost burden to producers. In addition, respondents saw demand and activity deteriorate further and they were even more worried about expected business conditions going forward.
The BER says the drop in the overall business confidence index would have been more pronounced were it not for the business confidence of building contractors that remaining unchanged at 43 index points.
Confidence in the industry was stable despite a notable deterioration in activity. The BER says the sector likely bottomed out in the second half of last year, although the growth momentum has eased since a few months ago, in part due to the tighter interest rate environment.
On the other hand, sub-contractors continued to fare better in the second quarter due to spending on load-shedding mitigation measures, such as solar power and inverters.
The BER says the consumer-facing sectors still supported confidence in the first quarter but amid a steep deterioration in sentiment for new vehicle dealers, retailers and to a lesser extent wholesalers, the overall RMB/BER BCI plunged lower, partly due to a decline in activity.
However, when the relationship between activity and confidence is considered over time, confidence would generally be somewhat higher with current activity levels. The BER says this underscores that there is more dragging down confidence than just a drop in output.
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Comments by respondents from different sectors flagged load shedding as a continued drag on sentiment as it hurts production capacity, increases costs and negatively affects profitability. Respondents also highlighted that any available capital goes to load shedding mitigation measures, such as the installation of solar power, rather than investment to build additional capacity.
Some respondents also mentioned the weak rand exchange rate and concerns about South Africa’s diplomatic relations with the rest of the world and its possible impact on trade relations, the BER says.
The increases in the interest rate environment, while inflation remains elevated, is also a challenge, according to the survey respondents, and it remains unclear what will meaningfully lift confidence over the short term, especially as load shedding could get worse over the winter months, the BER says.
“While just skirting a recession in the first quarter of 2023, the South African economy is far from being out of the woods. Indeed, more concerning is the fact that consecutive quarters of business confidence below 30 has historically coincided with contractions in either fixed investment, economic growth or both.”
However, the BER says, some of the drivers of negative sentiment, such as strained geo-diplomacy could be resolved in the coming months while current constraints on business conditions, such as load shedding could look somewhat better in 2024 and may support an improvement in confidence over time.
More structurally, an improvement in business confidence will require continued implementation of economic reforms under Operation Vulindlela, particularly energy procurement and logistics, beyond the current 45% success rate.