Business confidence subdued while retail sales drop

South Africans are still feeling the pinch of higher prices and trying to get their debt under control by spending less. This is reflected by subdued business confidence and a continued drop in retail sales.

According to the South African Chamber of Commerce and Industry (SACCI) Business Confidence Index (BCI) for July, business confidence stood at 106.9 in May and increased by 1.9 index points in June but decreased by 1.5 index points in July to 107.3.

Business confidence peaked at 117.3 in December 2022 but declined thereafter due to electricity supply shortages and its impact on economic activity, as well as the war in Ukraine affecting commodity prices. Since April 2023, it has stabilised around 107.

The business confidence index in July was three index points lower than in July 2022. However, the average BCI during the first seven months of 2023 was still 0.7 index points higher than the corresponding period in 2022. Despite being at lower levels, the BCI showed signs of stabilising.

In the medium-term, business confidence decreased by 3 index points compared to the previous year. Positive contributors were an increase in inbound tourist numbers, higher merchandise import volumes (especially diesel fuel), more new vehicle sales and higher share prices.

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Factors affecting business confidence

Lower merchandise export volumes, higher real financing costs (resulting from lower inflation), a weakening rand against major trading currencies due to unpredictability and a decrease in the real value of building plans passed subdued business confidence.

Business confidence in South Africa is influenced by various economic factors. The IMF’s updated outlook indicates a decline in global economic growth from 3.5% in 2022 to 3.0% in 2023 and 2024.

South Africa’s growth is expected to be modest, with a slight positive growth in 2023 and a projected growth of around 1.5% in 2024, according to the IMF. This projection aligns with the SA Reserve Bank’s (Sarb) forecast that estimates growth at 0.4% in 2023 and 1% in 2024.

South Africa’s headline inflation fell below the Sarb’s upper target range of 6%, prompting the bank to maintain the repo rate at its recent Monetary Policy Committee (MPC) meeting. Producer inflation (PPI) also decreased to 4.8% and intermediary output prices rose by only 2.4% year on year, indicating a potential easing of the inflationary process. As a result, a modest interest rate policy may persist.

The SACCI BCI has remained stagnant over the past four months, suggesting an unencouraging business climate for economic activity. This environment hinders improved longer-term prospects for the economy, resulting in limited fixed investment and inadequate conditions for robust economic growth and job creation.

In addition, the global economic environment is not currently favourable for South Africa as an open economy and investment destination, making it challenging to attract much-needed foreign capital and investment.

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Retail sales continue to decrease

It also does not help that retail sales dropped in the second quarter as consumers feel the pinch of high prices. The latest retail sales data shows that consumers kept their wallets shut in the second quarter.

According to Statistics SA, seasonally adjusted retail trade sales decreased by 1.0% compared to the previous quarter and should detract from real GDP growth during the quarter. On an annual basis, sales were down by 1.4% compared to a year ago, indicating that tighter monetary policy and higher prices erode disposable income and affect discretionary spending.

Seasonally adjusted retail trade sales inched higher by 0.2% compared to May in June and a decrease of 0.9% the month before. On an annual basis, sales were down by 0.9 % at the end of the first half of the year.

Economic research group, Oxford Economics Africa, says the outturn was broadly in line with its expectation of -0.8% compared to a year ago, but worse than the consensus forecast of -0.2%. Retail trade sales decreased by 1.0% in the second quarter compared to the previous quarter and should detract from real GDP growth during the quarter, as expected.

The biggest negative contributors to the seventh consecutive annual decrease were the subsectors for general dealers (-2.7% and contributing -1.2 percentage points) and retailers in food, beverages and tobacco in specialised stores (-4.4% and contributing -0.4 percentage points).

The group says South African consumers are having a tough time contending with the current high price environment, compounded by weak economic activity and high unemployment. “The demand side of the economy is experiencing strain, whereas industry performed better than expected during the second quarter, warranting minor upward adjustments to our current 2023 GDP growth figure of 0.2%.”

It is likely that the South African economy will record modest growth during the second quarter, the group says. “However, looking ahead, we do not see any meaningful improvement for the domestic economy in the near term as structural constraints, together with a high-cost environment weigh on growth prospects.”