Business confidence stalls at start of 2025 after three increases

Business confidence has stalled at the start of 2025 after three consecutive increases, with only new vehicle dealers preventing a slump in business confidence.

The RMB/BER Business Confidence Index remained unchanged at 45 index points in the first quarter of 2025 and while it was a touch above the long-term average reading of 43 points and well above the sentiment level recorded at the start of last year, it is worrying that four of the five sectors saw confidence slip compared to the fourth quarter of last year, Isaah Mhlanga, chief economist at RMB, says.

Mhlanga says a confidence reading of 45 points means that a slight majority of respondents across sectors are pessimistic about current business conditions in South Africa.

The survey took place from 5 to 24 February, with the bulk of responses received early in the survey period. This means that many responses were received just after US President Donald Trump announced that the US would cut aid to South Africa.

“While this would have had little direct impact on the sectors surveyed, it signals a further souring of already strained US-SA trade relations. Indeed, these concerns featured in some of the comments from survey respondents, with references to worries about the impact of the continuation of Agoa.

“However, not all concerns were globally driven. Respondents in the building and manufacturing sector, in particular, were worried about ArcelorMittal’s potential closure and domestic demand in general. The majority of responses were received before the delay in tabling Budget 2025.

“In all, despite the composite activity indicator ticking along at an elevated level and in fact even increasing slightly from the fourth quarter, business sentiment did not improve further.”

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Business confidence in the first quarter compared to the second quarter

The changes in sentiment compared to the previous quarter presented a reversal from what happened in the furth quarter. The recovery was broad-based during the last quarter, with all but new vehicle dealers seeing higher confidence.

In the first quarter, new vehicle dealers joined the party late and saw a surge in confidence, while all other sectors saw confidence decline, Mhlanga says. Considering the levels, new vehicle dealers and retail traders have confidence readings well above their long-term average, while the remaining sectors see confidence around long-term levels.

He says the first quarter survey results are therefore not a bad outcome, but signal that the recovery seen in the second half of 2024, has stalled.

New vehicle dealers’ confidence increased by 29 points to 52. Mhlanga says although new vehicle traders tend to see sharper swings in confidence than the other sectors, this was still a significant upsurge.

The increase in confidence was underpinned by a big improvement in sales volumes with somewhat lower interest rates, two-pot retirement withdrawals and pent-up demand providing a boost. A renewed knock to the consumer (in the form of, for example, higher taxes or lower sentiment) presents the biggest risk to the sector.

“Should confidence reverse, it would drag the composite index lower, unless other sectors can pick up the slack.”

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Strong quarter for retail in business confidence

Despite a slight dip in confidence, the retail sector experienced another strong quarter. Sales volumes remained positive for a second consecutive quarter, while wholesale traders saw the biggest decline in confidence, although it came from an elevated level. The drop in confidence corresponds with a drop in sales and a deterioration in business conditions in the sector, Mhlanga says.

Building contractors stayed in the middle of the pack, with confidence ticking down by six points to 45. This is still somewhat above the long-term average reading. “It is quite encouraging that respondents are fairly optimistic about the next quarter, especially in terms of activity.”

Manufacturing business confidence dipped by two points to 34. While export demand remained surprisingly resilient, domestic demand was weaker. Production improved relative to the fourth quarter, but investment dropped back somewhat.

Mhlanga warns that some of the survey results can be seen as flickering warning lights. “Without the sharp improvement in new vehicle dealers’ confidence, the index would have declined at the start of the year, but the optimism by new vehicle traders is underpinned by a strong underlying performance and thus warranted.”

He says the consumer-linked sectors still performed well in the first quarter, but the question is whether this momentum can be sustained in coming quarters or whether the more industry-linked sectors can take over the baton of growth.

“The boost due to withdrawals from the two-pot retirement savings will fade, while interest rates are unlikely to move much further down in an environment of slightly rising inflation. Possible tax increases could burden the consumer further. More geopolitical uncertainty could undermine confidence.”

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Business confidence influenced by Trump’s cut of aid to SA

Jee-A van der Linde, senior economist at Oxford Economics Africa, says a confidence reading of 45 points means that a slight majority of respondents across sectors are pessimistic about current business conditions.

“Many responses were received just after Trump announced that the US would cut all aid to South Africa. While there is uncertainty regarding the timing and magnitude of the impact of these cuts on these sectors, what it implies for South Africa-US relations has not been good for confidence. Another concern is the fact that new vehicle dealers kept the overall index from sliding.”