Increasing business confidence shows cautious optimism

Increasing business confidence in the first survey since the formation of the government of national unity shows cautious optimism about improving business conditions.

The improvement in sentiment was likely supported by a continued absence of electricity supply disruptions and political certainty after the election.

However, Isaah Mhlanga, chief economist at RMB, says although the improvement in the forward-looking investment indicator is encouraging and would provide a real impetus to economic growth, we need to see higher confidence for this to materialise.

According to the RMB/BER Business Confidence Index (BCI) in the third quarter of 2024, the first post-GNU index increased by another three points to reach 38 in the third quarter of 2024 after increasing by five points in the second quarter.

Although respondents still noted constraints, especially weak demand, they were less negative about current conditions and were encouragingly more upbeat about business conditions going forward. Mhlanga says for the first time since early 2022, a slight net majority of respondents across the different sectors expect business conditions to improve in the next quarter.

The three-point increase brought the composite index to the best level since the fourth quarter of 2022, when confidence was also at 38 points. At the current level, just under four out of ten respondents were satisfied with prevailing business conditions.

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Mixed bag of business confidence across sectors

Of the five sectors making up the index, wholesalers and building contractors saw a decline in confidence (although remaining at relatively high levels), manufacturing remained unchanged and retailers and new vehicle dealers showed an improvement in confidence.

According to the index new vehicle dealers registered the biggest increase in confidence of a solid 17 points to 27 in the third quarter, also a one-year high. However, despite the big surge, the sector remains the most pessimistic with less than three in ten respondents satisfied with prevailing business conditions.

“Business confidence in the sector has been extremely depressed over the last three quarters, with less than two in ten surveyed respondents satisfied with prevailing business conditions. Be that as it may, the sector seems to have bottomed and is slowly recovering. Moderating inflation and the associated reduction in policy interest rates should provide a boost to household disposable income and support the uptick,” Mhlanga says.

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Wholesale trade had most business confidence

Despite a two-point drop from the second quarter, the wholesale trade was still the most optimistic sector surveyed, with just over half of respondents satisfied with prevailing business conditions. At 51%, this is six points better than the long-term average reading of 45%, which is supported by the underlying data that generally reflects upbeat conditions.

While total sales volumes were unchanged from the second quarter, underlying trends moved in opposite directions. Wholesalers of consumer goods noted lower sales compared to the second quarter, although it was still better than the long-term average.

On the other hand, wholesalers of non-consumer goods reported that sales performed better compared to the second quarter, with volumes now in line with the long-term average reading, Mhlanga says.

Retail trader confidence improved from its long-term average of 39 index points to an above-average 45 index points in the third quarter. While actual retail sales volumes could be somewhat lower in the third quarter of 2024 compared to the strong sales during the same period in 2023, durable and semi-durable traders’ sales volumes improved in the third quarter while that of non-durables declined.

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Not much business confidence among building contractors

The outcome for building contractors was a bit more disappointing as confidence fell by 6 points to 41 index points after a five-point increase in the second quarter. Mhlanga says the current level is roughly in line with the confidence readings seen throughout 2023. A recent trend of outperformance by the non-residential sector continued in the third quarter, with the residential sector under significant pressure.

Confidence in the manufacturing sector remained unchanged at 28 index points amid a general improvement in the assessment of current business conditions. However, conditions in the manufacturing sector deteriorated, with a decline in export and domestic demand contributing to a decline in production.

Mhlanga says the most notable was a significant decline in the seriousness of the general political climate as a constraint on business and investment decisions. “Indeed, forward-looking investment outlays turned notably more positive in the third quarter.”

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Not enough demand to fuel faster uptick in business confidence

However, he points out that amid continued pressure on local consumers observed across the sectors and sluggish export demand noted by manufacturers, there was not enough demand to fuel a faster uptick in sentiment.

“Broadly speaking, activity did not materially improve compared to the second quarter. Data released by Statistics South Africa showed a slight quarterly expansion of 0.4% in GDP after a (revised) flat performance in the first quarter. Another positive outcome is likely in the third quarter, but a recovery in demand is required to get momentum going.”

Fortunately, he says, the widely anticipated interest rate cut in South Africa later this month on the back of lower consumer inflation and a boost from the introduction of the two-pot retirement system, should spur domestic demand through the remainder of the year.

“This should benefit sentiment, but logistics constraints remain top of mind and will need to be tackled urgently to support a sustained lift in business confidence.”

Jee-A Van der Linde, senior economist at Oxford Economics Africa, says the marginal uptick in the overall index was somewhat underwhelming, considering the slower pace of improvement compared to the previous quarter.

“The latest results reflect cautious optimism supported by stable electricity supply and more political certainty after the elections in May. Demand conditions are not ideal yet, but they should improve in the second half of 2024 on the back of rising confidence and lower interest rates.

“Businesses are less gloomy than they have been over the past few quarters, but there is still a lot of ground to be made up (12 points to reach the neutral level). South Africa has not registered a sustained improvement in business confidence in a long time.

“Still, increased private-public partnerships might change this and are fundamental to unlocking new investment to boost South Africa’s growth potential.”