Confidence collapses in South Africa

 ·22 Jun 2023

Business confidence across several sectors in South Africa has declined to extreme lows, with the latest ‘other services’ survey from the Bureau of Economic Research (BER) further highlighting the glum outlook.

According to the Q2 2023 Other Services survey, business confidence dropped by a further two points from Q1 2023’s 45 points to 43 points – following a record 23-point drop in that quarter.

The BER’s confidence index ranges between zero and 100, with zero representing no confidence at all and 100 representing extreme confidence, where all participants are completely satisfied with current business conditions.

Currently, only four out of 10 business executives in the other services sector are satisfied with their prevailing business conditions.

“The decline in confidence was supported by a further downtick in activity. However, despite the decline, the current level of activity is normally associated with a somewhat higher level of confidence,” the BER said.

“Based on comments by some of the respondents, a challenging business environment amid intense load-shedding during the survey period, as well as high borrowing costs while inflation remained elevated, contributed to the negative sentiment.”

Excluding the confidence level of 1 achieved in Q1 2020, business confidence in the transport sector reached a record low of 11, corresponding to underlying degeneration in business conditions and business volumes.

Business confidence amongst the realtor subsegment saw its fifth consecutive quarter drop to 34, despite a smaller net majority reporting a decline in business volumes compared to Q1 2023. Ultimately, a decline in profitability hurt sentiment.

Following a two-point increase to 75 points in Q1 2023, business confidence in the hospitality subsector nosedived by 23 points to 52 in Q2 2023. Profitability turned negative for the sector for the first time since mid-2021.

However, business confidence in the business services grew from 47 in Q1 2023 to 59 in Q2 2023, with a net 21% reporting an increase in volumes of sales relative to Q2 2022 – it was the only subsector to see any growth.

“Overall business volumes declined further in the second quarter, but remain better than the
long-term average. This suggests that the sector may continue to provide some support to the economy while the more energy-intensive industrial sectors are straining,” the BER said.

“However, with the exception of foreign tourism, many of the services captured in this survey are linked to the general strength of the local economy. Therefore, the relative outperformance will be difficult to maintain going forward without a more broad-based economic recovery.”

Bleak environment

The BER has released several business confidence surveys over the last few weeks, with sentiment remaining downcast across all sectors.

Overall, load shedding, soaring interest rates, high inflation levels and a weak rand have hurt business confidence in South Africa, with less than half of respondents in all of the BER’s surveys expressing satisfaction with prevailing market conditions.

The latest RMB/BER Business Confidence Index (BCI) recorded a decline from 36 in Q1 2023 to 27 in Q2 2023.

“Comments by respondents through the different sectors flagged load-shedding as a continued drag on sentiment as it hurts production capacity, increases costs, and negatively affects profitability,” said the BER.

“As such, respondents highlight that any available capital is going towards load-shedding mitigation measures – such as the installation of solar power – rather than an investment to build additional capacity.”

Absa’s Manufacturing Survey for Q2, done in collaboration with the BER, also noted that load shedding was the main driver for the weak sentiment in the sector.

“The Q2 2023 confidence level was unchanged at 17 since the previous quarter – lower than the trough of 20 reached during the global financial crisis,” said Absa.

Moreover, the FNB/BER Building Confidence Index showed that most construction and building companies are dissatisfied with the market conditions facing their business.

Building confidence declined from 33 in Q1 2023 to 28 in Q2 2023, following a prior increase due to a rise in building work in the Western Cape.

“This (building work in the Western Cape) 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,” said Siphamandla Mkhwanazi, a senior economist at FNB.

Retailers also expressed negative sentiment, with the BER’s Retail Trade survey recording a reduction in retailer confidence from 34% in Q1 2022 to 20% in Q2 2022.

The BER added that the decline in retailer confidence is linked to the major drop in profits due to increasing load shedding-related costs, high levels of food inflation and rocketing interest rates.

“When asked if they expect business conditions to be better/the same/poorer next quarter, the majority of retail respondents (net negative 56%) answered that they expect conditions to worsen in the near term,” the BER said.

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