‘Loss of business confidence could be regained’: Sacci after severe dip in May

Although there was another severe decline in business confidence in May and building confidence in the first quarter in 2023, there are signs that the business climate might be settling down after the uncertain effects of electricity supply have been factored in.

The South African Chamber of Commerce and Industry (Sacci) Business Confidence Index (BCI) declined by 4.2 index points in April 2023 and settled down at 106.9 in May 2023, a decrease of 10.4 index points since the BCI measured 117.3 in December 2022.

The virtual sideways movement between April and May 2023 of only 0.2 index point suggests, according to the Sacci, that the business climate could be evening out following the effect of load shedding. The index stood on 111.3 in March.

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There were three notable positive effects on the BCI between April and May 2023: exceptionally more new vehicles were sold in May, while energy supply improved thanks to a lower US dollar crude oil price and manufacturing output increased from a low unenergetic level.

The index shows the largest negative short-term impacts were related to foreign trade relations with less merchandise import and export volumes, less inward tourists and the weaker rand exchange rate against major trade and investment currencies.

Severe dip in business confidence

Sacci says the business environment took a marginal dip in April 2023 but declined more severely in May 2023.

“Compared to a year ago, positive impacts came from increased merchandise import volumes, increased inward tourists and notably more new vehicles sold.”

Less merchandise export volumes, pressure on the Rand and higher real financing costs were particularly causing a dent in business confidence.

In the short and medium term, the financial environment had a more negative effect on the business climate than reflected by real economic activity.

“The substantial swing from a surplus on the trade account in the first four months of 2022 to a notable deficit in the first four months of 2023 does not only reflect the effect of global trade on South Africa, but also indicate the economic sensitivity of South Africa to international trade relations.”

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Sacci says this volatility affects business and investor confidence and eventually economic performance, employment and wealth and warns that threats of losing out on lucrative trade agreements may dent an important element of South Africa’s economic relationships and well-being.

“With a global economy that is slowly recovering to perform optimally, it is essential that due attention is paid to place South Africa back on a trajectory attracting foreign investment and extend lucrative trade relations.

“A large part of the loss of business confidence could be regained by following the best global economic and business interests of South Africa and attending to local structural impediments. 

Building confidence at its lowest level since late 2020 

The FNB/BER Building Confidence Index also declined, shedding five points to register a level of 28 in the second quarter due to a sharp fall in sentiment among building sub-contractors and hardware retailers weighing heavily on the overall index.

The Bureau for Economic Research (BER) at Stellenbosch University says it was disappointing that the activity of main contractors showed renewed weakness as sentiment in the building sector has been stable, albeit at a relatively low level, for the past few quarters.

The index fell to 28 in the second quarter from 33 in the first quarter of the year. The BER says the current level of the index means that more than 70% of respondents are dissatisfied with prevailing business conditions.

Changes in the various sub-sectors compared to the first quarter include building material manufacturers, where the confidence level increased by 7 points, quantity surveyors and architects where the confidence level declined by 3 points each, hardware retailers where the confidence level decreased by 13 points and building sub-contractors whose confidence declined by 17 points.

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However, the confidence level of main contractors was unchanged. The index measuring activity among main contractors gained momentum towards the end of last year and the start of this year, lifting sentiment to around its long-term average.

However, it was disappointing that activity growth eased sharply, although confidence remained at 43.

“One of the primary factors supporting the increase in activity in the recent past was the resurgence in building work in the Western Cape.

“This is starting to wane in the face of the higher interest rate environment and possibly also an easing in the pace of semigration, among other things,” Siphamandla Mkhwanazi, senior economist at FNB, says.

Outlook for second half of 2023 also not great

In addition to the softer growth this quarter, prospects for building work over the next few quarters also turned negative. Mkhwanazi says both forward-looking indices, respondents’ own expectations for activity next quarter and the rating of the lack of new demand as a business constraint, worsened significantly.

“The results of this quarter’s survey suggest that the robust momentum in main contractor activity seen in the recent past was short-lived. While activity among main contractors receded, subcontractors’ activity remained well supported but sentiment declined to 40, from 57 in the first quarter.”

Mkhwanazi says although sub-contractors continued to benefit from work related to alternative energy sources, there is an expectation that work will not be as abundant in the third quarter, which weighed on confidence.

Architect activity showed a marked improvement, but confidence was still lower at 23, from 26 in the first quarter. Similarly, the business confidence of quantity surveyors was lower at 26 from 29 in the first quarter, despite a mild uptick in activity.

After slipping to 35 in the first quarter, sentiment among hardware retailers fell further to 22, the lowest confidence has been since the second quarter of 2020.

“Retail sales volumes remained under significant pressure, which weighed heavily on profitability. Moreover, the outlook for sales is downbeat, with the index measuring sales orders also weakening significantly. All these factors considered it is no wonder their confidence declined.”

The confidence of building material manufacturers increased to a still low 13, from 6 in the first quarter.

Mkhwanazi says after remaining essentially unchanged over the last year, the index declined by five points to 28 in the second quarter, underpinned by a decline in main contractor activity as well as continued weaker hardware retailer sales. He is also concerned about the broad-based expectation that activity and sales will likely come under further pressure over the short term.

“In contrast, activity at the start of the building pipeline improved. Sub-contractor activity also remained robust amid the private sector’s push for energy independence. 

“Overall, while we are still convinced that the building sector bottomed sometime in the middle of last year, the momentum eased in the second quarter. This is most evident given the moderation in activity growth among main contractors, especially those operating in the Western Cape,” Mkhwanazi says.