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Business confidence improved in the second quarter, but businesses were still quite gloomy ahead of the election when the survey was done.
The increase in business confidence also comes from already low levels and does not necessarily alter the view of businesses that the business environment remains unfavourable.
The RMB/BER Business Confidence Index (BCI) increased by five points to 35% in the second quarter which means that roughly just over a third of the survey respondents were satisfied with prevailing business conditions.
The fieldwork for the Index was conducted among 2 500 businesses from 9 to 27 May 2024.
There are two salient features to this survey, which could have played a role in the results, Isaah Mhlanga, chief economist at RMB, says.
“Firstly, the uncertainty around the election was top of mind for many respondents, with comments alluding to a ‘wait-and-see’ approach, likely holding back domestic demand.
“Secondly, there has been no load shedding for over a month before the survey and throughout the survey period, which could have had a more positive impact on survey respondents.”
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However, he says, we must wait and see the implications of coalition arrangement on policy and the business environment, as well as the sustainability of the improvement in the energy availability factor (EAF) observed over the past two months before we can draw any link to the BCI in future.
Mhlanga says the five-point increase in the Index followed two consecutive declines and brought confidence back closer to the 36-point level seen in the first quarter of 2023.
Confidence rose in four of the five sub-sectors, except for new vehicle dealers.
“It is noteworthy that current confidence among wholesalers and building contractors is above its long-term average level, while confidence among retailers is at its long-term average level. Wholesale traders were the most optimistic, with 53% of respondents satisfied with prevailing business conditions”.
Consumer goods traders were upbeat about the increase in sales volumes for a second consecutive quarter, while non-consumer goods traders reported another decline in sales.
Mhlanga says confidence in the closely linked retail sector was slightly worse than that of wholesalers but still increased by five points to its long-term average level of 39%.
“On balance, sales volumes were better, largely driven by durable goods, with hardware retailers a notable outperformer. In contrast, sales volumes for non-durables declined as selling prices increased.
“Sales volumes for semi-durable goods sales also declined in line with non-durables, despite declining selling prices.”
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Business confidence among building contractors picked up once more and rose above its long-term average of 44% to reach 47%, going against expectations for a continued slowdown in the building sector which could have weighed on confidence.
The uptick was supported by fairly solid activity in KwaZulu-Natal and the Western Cape and shows that the sector remains resilient, he says.
On the other hand, confidence among new vehicle dealers, who are arguably most sensitive to the prevailing high borrowing costs and subdued consumer demand, declined by 6 points to 10%.
“This means that just one out of ten respondents were satisfied with prevailing business conditions, well below the long-term average of 43%.”
Barring the ultra-depressed new vehicle dealers, manufacturers remained the most downbeat although business confidence still increased by 7 points to 28%, the best level in two years.
Production improved somewhat from the first quarter, particularly for food and metals manufacturers.
Export demand ticked marginally up while domestic demand remained sluggish. A sharp decline in the average hours worked per factory worker despite the two months without load shedding is a concerning leading indicator for the sector, Mhlanga says.
According to the GDP data released by Statistics SA yesterday, the economy marginally contracted by 0.1% in the first quarter of 2024 following an upwardly revised expansion of 0.3% in the last quarter of 2023.
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“Of concern and consistent with lower levels of business confidence, the growth in gross fixed capital formation contracted for the third consecutive quarter in the first quarter. The survey results point to some lift in activity in the second quarter.
“Still, the ‘wait-and-see’ approach ahead of the election could have held back a more pronounced recovery in demand, while doubts about the sustainability of no load shedding may have prevented production from being ramped up more significantly.”
Mhlanga says business confidence ahead of the election showed a welcome uptick but remained below the levels conducive to foster increased private sector investment and faster economic growth.
“We would need to see a sustained improvement in confidence for investment levels (especially non-energy), GDP growth and importantly employment growth to pick up.
For this to materialise, the new administration must accelerate the implementation of the structural economic reforms started in the previous administration to improve the business operating environment of the South African economy.”
Some good progress has been made on the energy front under Operation Vulindlela, but binding supply-side constraints remain a concern as progress in logistics, the water sector and safety and security, among others, remain extremely slow, he says.
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“On a positive note, on the demand side, the survey suggests that price pressures are abating with selling price increases generally slowing across the different sectors.
“Lower inflation through the remainder of the year and the possibility of a somewhat lower policy interest rate later in the year could boost consumer spending.
“This could aid the struggling new vehicle dealers, in particular, who have been a drag on the overall Index over the last three quarters.”
Jee-A van der Linde, senior economist at Oxford Economics Africa, says South Africa’s national elections were top of mind for many respondents, with businesses generally in favour of adopting a ‘wait-and-see’ approach, which likely weighed on domestic demand.
“Another salient feature of the business surveys was that there has been no load shedding since late March. However, there is little data for Q2 available so far and at this stage, it remains to be seen whether the supply side of the economy benefited on a sequential basis.
“Our view is that the underlying data and current conditions paint a bleak picture for the demand side. Indeed, the first quarter data confirmed that the domestic economy is in a dismal state.
“We think economic conditions, as well as sentiment, are only likely to improve from the second half of the year once there is more certainty about what South Africa’s national coalition might look like.”
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