Business confidence dips while load shedding looms

Business confidence has dipped in January by 4.4 index points to 112.9 after picking up in 2022 and especially in December when load shedding did not pose such a big risk.

According to the SACCI Business Confidence Index (BCI), the last time it recorded a level higher than the 117.3 in December was in October 2015, while the annual average of 109.6 in 2022 also surpassed the pre-Covid level of 107.0 in 2019, as well as the improved 2021 level of 108.5.

Business confidence gained strong momentum towards the end of 2022 with the BCI improving from an average of 108.6 in the first half of 2022 to 110.7 in the second half. On a quarterly basis the improvement was even more pronounced as the BCI improved from 108.9 in the third quarter of 2022 to 112.5 in the fourth quarter, an increase of 3.6 index points.

The December 2022 BCI level of 117.3 improved by 6.4 index points on November 2022 and by 10.9 on December 2021. However, SACCI says, it appears that the strong upward momentum has waned as the BCI dipped between December to 112.9 in January.

Positive impact in December

Eight of the 14 subindices of the BCI had a positive impact on the BCI between December and January 2023. These included increased merchandise import volumes, increased tourist numbers, better real retail sales on Black Friday and higher share prices.

SACCI says energy supply, including electricity blackouts, had a direct and severe negative effect on business confidence in January although the lower cost of fuel provided some relief but remained relatively high at 23% higher than a year ago.

Although the medium-term business environment remained positive as the BCI still improved on last year, it was at a slower pace, with the most prominent and only notable year-on-year positive impact made by tourism, while increased new vehicle sales also reflected a positive business climate.

Economic data pointed towards improving conditions towards the end of 2022 as the holiday period was freed of regulations and limitations, fuelling positive expectations among business and the public in general, SACCI says.

“However, electricity supply shortages were looming in the background and had a short-term positive impact on confidence although everyone knew higher energy demand at the start of 2023 will might escalate the electricity crisis.”

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Persistent higher levels of load shedding

The index points out that South Africa was already heading for serious electricity shortages caused by persistent higher levels of load shedding during the holiday period towards the end of 2022. “Only as the economic startup in 2023 began, the supply shortages for electricity became evident with serious implications, not only for households, but across all sectors of the economy.”

SACCI says the availability of electricity is of critical importance for the functioning of the economy and production processes. “Although the real gross domestic product (GDP) does not seem to be affected much by electricity supply before 2008 with ample reserve supply capacity, real GDP growth started to level off as electricity supply declined.”

The shortage of supply also affected prices, causing tariffs to increase and affected the price elasticity of demand and less income for local authorities. “It is most evident that consistent electricity supply is a critically important input in the economy. Before 2008, real GDP growth and electricity demand moved in tandem.

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Effect on GDP

“After 2008 it appears that GDP per unit of electricity increased with the economy becoming more energy efficient. However, from 2018 onwards, GDP growth became subdued indicating that the efficiency gains of the earlier period may have receded. It also implies that the severity of load shedding, notably at its present levels, has a stark direct adverse impact on real GDP growth and functioning of the economy.”

According to SACCI it is important to implement a meritocracy programme to fundamentally restore the functionality of Eskom, where skills and competence drive the organisation back to good health. “It is about appointing the best people to run not only Eskom but also all public sector entities and SOE’s.”

SACCI warns that the advantages of attracting foreign trade and direct foreign investment might speedily dwindle if the energy crisis is not addressed in a meaningful way. “The immediate needs of improving Eskom’s current capacity constraints and restoring its full generating capabilities should receive urgent attention.”