These businesses in South Africa are taking a beating – and you already know why

 ·22 Mar 2023

Confidence in South Africa’s other services sector has plummeted in the first quarter of the year, the latest data from the Bureau for Economic Research (BER) shows, as companies drop services in favour of higher spending on load shedding solutions.

After continuously increasing since reaching a nadir during the level 5 lockdown in the second quarter of 2020, confidence in the other services sector plummeted in the first quarter of the year, showing a 23-point drop on the index from 68 to 45.

This is the largest ever recorded in the survey’s 18-year existence the BER said.

The other services sector comprises hotels, restaurants, transport, real estate and business services. They are denoted as “other” services to distinguish them from the retail, wholesale and motor trade sectors, which are also part of the services sector but included in the RMB/BER business confidence index (BCI).

The other services sector is not included in the BCI due to its lagging business cycle characteristics, i.e., it recovers/deteriorates later than the BCI sectors, the BER said.

Although the other services sector contributes a considerable 22% to GDP and employment, the BER does not include it in the BCI to safeguard its advanced signalling properties.

The fall in the overall index stemmed from the transport and business services sub-sectors.

Confidence in the transport sub-sector collapsed to 14 and in the crucial3 business service sub-sector fell from 64 to 47.

In contrast, confidence in the hospitality sub-sector increased from 73 to 75, a far cry from zero at the time of the hard lockdown in 2020

In the case of the last remaining sub-sector, real estate, confidence declined from 47 to 43.

The main driver behind the huge drop in confidence in these sectors is the persistent load shedding which has devastated businesses and economic operations over the period.

This was felt particularly hard in the business services sector – such as renting of machinery and equipment, computer services, legal services, accounting, consulting engineering, advertising, building and plant cleaning, debt collection and exhibitions – as fewer businesses made use of these services and instead increased spending on load shedding mitigation measures.

In the first quarter, the only bright spot was hotels and restaurants, which recorded even faster activity growth than during the fourth quarter of 2022.

Part of the exceptionally strong year-on-year growth could be attributed to a base effect, the BER said.

In the first quarter of 2022, not all Covid-19 restrictions were lifted and the international travel bans knocked foreign tourist numbers. In contrast, the current summer holiday season saw international visitors return.

Another explanation for the strong growth is a partial resumption in business travel, more local trips, increased eating out and, in the final instance, the normal pre-Covid summer seasonal factors, the BER said.

The rate of increase in selling prices in the hotels and restaurants sector skyrocketed as accommodation rates increased and restaurants had to adjust their menu prices sharply upwards to compensate for higher food prices and load-shedding costs.

Things look bleak in all other sectors, however.

Road freight transport and other supporting services – such as travel agencies, cargo handling and freight forwarding – had to contend with higher fuel costs, fierce competition and delays at ports over the period.

Real estate confidence declined further from 47 to 43. Given that the long-term average is 45, confidence could be regarded as neither high nor low in the first quarter, the BER noted.

Respondents commented that the continued improvement in property management – such as renting – partly compensated for the weaker sales of properties.

“After continuously recovering in 2021 and 2022, the fortunes of the other services sector reversed abruptly in the first quarter of 2023. While hospitality kept on improving, the situation in transport, real estate and business services took a turn for the worse, primarily due to extensive load-shedding and surging costs,” the BER said.

“Whereas the other services sector supported GDP growth for the most part in recent quarters, it seems destined to join the more energy-intensive sectors of the economy in detracting from growth in the first quarter of 2023.”

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