Business confidence increases in third quarter, but still weak
Business confidence stays below the mid-point of 50, which means local companies do not believe conditions favour doing business.
Business confidence increased in the third quarter, but is still weak, with the current level of the business confidence index suggesting two-thirds of respondents are dissatisfied with prevailing business conditions.
After falling to 27 in the second quarter, the RMB/BER Business Confidence Index regained some ground to register a level of 33 in the third quarter. The index reflects the general state of the economy as it relates to conditions to do business in South Africa.
The Bureau for Economic Research (BER) conducts a quarterly survey among a constant sample of manufacturing and construction companies, retailers and wholesalers and car dealers. The index has values from 0 to 100, with 0 denoting pessimism and extreme uncertainty, 50 showing neutrality and 100 the highest confidence.
The challenges of relatively high interest rates, the resultant strain on consumers and social unrest meant business activity remained constrained but encouragingly, the slight reprieve in the incidence of load shedding provided support to some firms, especially in manufacturing, the BER said.
Only building contractors’ business confidence declined in the third quarter but at 41, builders remain more upbeat than other respondents. The biggest fall in sentiment in the second quarter was among the consumer-facing sectors, namely new vehicle dealers and retailers. Both rebounded this quarter, with the business confidence of retailers gaining 12 index points to reach 32.
According to the BER, sales remained weak overall, while profitability improved thanks to softer purchasing price increases. Interestingly, the index measuring the rate of selling price increases also fell significantly and is now at its lowest level since the third quarter of 2020.
When nobody is buying, business confidence falls
In terms of the sub-segments, the confidence of non-durable and semi-durable goods retailers was at its best level this year, but sentiment among durable goods retailers deteriorated further. This trend is mimicked in the measure for growth in sales volumes, which saw a steep decline.
Wholesaler confidence was up by 6 points to 38 although the sales volumes of consumer goods continued to struggle. Similarly, new vehicle dealer confidence moved higher to 30 (from 23 in the second quarter), despite a further deterioration in sales and orders placed, while stock levels remained elevated.
At 23, from a level of 17 in the first and second quarters of 2023, the business confidence of manufacturers remains the lowest among the sectors included in the composite index. However, the BER said, the underlying results are not as downbeat as the sentiment reading suggests.
“Total production is close to its long-run average, led by improvements almost across the board, likely thanks to the less frequent load shedding over the past few weeks compared to much of the first half of the year and a return to production in industries that recently experienced other non-energy-related disruptions.”
Growth in exports also increased significantly. On a less positive note, the BER points out production costs remained elevated, as well as the rating of new demand and the political environment as business constraints. The results from the manufacturing sector are somewhat encouraging, although sentiment is weak.
Building work gathered further momentum in the third quarter of 2023. Despite this, the BER said building contactor confidence slipped to 41, from 43 in the second quarter of 2023. The business constraints related to the availability of building materials and new work remained quite elevated, likely weighing on sentiment.
Load shedding not the only culprit
The BER said many of the respondents’ comments again related to the impact of load shedding, but this quarter the taxi strike in the Western Cape was also mentioned frequently, as well as the N3 truck attacks to a lesser extent.
“There is no doubt this had a detrimental effect on the economy in the third quarter. While some sectors were likely more affected than others, respondents lamented the lack of production due to staff shortages, as well as the cost of having to repair damage. The confidence of executives in the Western Cape nonetheless gained 4 points to record a level of 35, but it would likely have been higher if not for the disruption.”
Second quarter gross domestic product (GDP) growth continued to surprise on the upside, expanding by 0.6% compared to 0.4% of the previous quarter. The BER said this affirms the underlying resilience in the economy, particularly in sectors such as manufacturing, where load shedding tends to have a bigger impact on activity.
Investment in machinery and other equipment, where renewable investments are captured, continued to expand in the second quarter despite the low business confidence, suggesting firms are continuing to buffer themselves against the adverse effects of load shedding.
The BER said the key messages from this set of results are:
- Interest rate sensitive sectors are suffering as reflected by downbeat sales among durable goods retailers, new vehicles dealers and to a lesser extent, wholesalers of consumer goods.
- Manufacturing production increased within the reduced load shedding environment.
- Core consumer inflation (headline inflation excluding food and energy) is set to remain on an easing trajectory in the third quarter of 2023 although firms are not yet passing on all of the lower producer prices on to consumers.
- From the comments it is clear the Western Cape taxi strike weighed on activity in the region.
- Activity growth in the building sector is looking more sustained.
“The headline result of the index suggests the economic malaise affecting South Africa in preceding quarters continued into this one. However, on deeper inspection, there are different forces at play with manufacturing production and building activity improving, but interest rate sensitive sectors distressed.
“Looking ahead, it will become increasingly important to also consider the impact of unrest, such as recently seen in the Western Cape, on South Africa’s economic fortunes in the run-up to the national elections next year,” Isaah Mhlanga, chief economist and head of research at RMB, said.