Positive turn for businesses in South Africa – but confidence is still low

South African businesses are cautiously optimistic about business conditions, but over 60% are still not satisfied with the prevailing business conditions.

The RMB/BER Business Confidence Index (BCI) rose by three points to reach 38 in Q3 2024.

“This is the first business sentiment survey in South Africa following the formation of the Government of
National Unity (GNU) and reflects cautious optimism about improving business conditions,” said RMB.

“Although respondents still noted constraints, especially weak demand, they were less negative
about current conditions and, encouragingly, were more upbeat about business conditions going
forward.”

“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-month increase has brought the BCI to its highest level since Q4 2022.

At the current level, just under four out of ten respondents were satisfied with prevailing business conditions.

Of the five sectors that comprise the BCI, wholesalers and building contractors saw a decline in confidence but are still at relatively high levels.

Manufacturing remained unchanged, and retailers and new vehicle dealers saw an improvement in confidence.

New vehicle dealers saw the most significant increase in confidence, rising by 17 points to 27 in Q3 – 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 a reduction in interest rates should support household disposable income in the near term. The South African Reserve Bank is widely expected to cut interest rates later this month.

In spite of a two-point drop, the wholesale trade was still the most optimistic sector surveyed, with more than half of respondents happy with the prevailing business conditions.

At 51%, it is six points better than the long-term average reading of 45%, supported by the underlying data that generally reflects upbeat conditions.

Although total sales volumes were unchanged from Q2, underlying trends moved in opposite directions.

Wholesalers of consumer goods also saw lower sales compared to Q2, but it is still performing better than the long-term average.

Wholesalers of non-consumer goods, however, saw consumer goods reported that their sales performed better compared to Q2 2024, with volumes in line with the long-term average reading.

Retail trader confidence also improved from its long-term average of 39 index points to an above-average 45 index points.

“While actual retail sales volumes could be somewhat lower in the third quarter of 2024 compared to the strong sales seen during the same period in 2023, durable and semi-durable traders’ sales volumes improved in the third quarter while that of non-durables declined.”

The outcome for building contractors was disappointing. Confidence fell by 6 points to 41 index points after a five-point increase in Q2.

Although the current level is roughly in line with the confidence readings seen in 2023, a recent trend of outperformance by the non-residential sector continued in Q3, with the residential sector under significant pressure.

Lastly, confidence in the manufacturing sector remained unchanged at 28 index points following a general improvement in assessing current business conditions.

“However, conditions in the manufacturing sector deteriorated, with a decline in export and domestic demand contributing to a decline in production.”

“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.”

Bottom line

The overall improvement in sentiment was likely due to a continued absence of load shedding and the end of the political uncertainty following the May 29 election.

That said, with the continued pressure on local consumers and a sluggish export demand noted by manufacturers, there was not enough demand to see a faster uptick in sentiment.

Activity did not materially improve compared to Q2, where GDP increased by 0.4% quarter-on-quarter in the second quarter after a (Revised) flat performance in Q1.

Another positive outcome is expected for Q3, but a recovery in demand will be required to get momentum going.

“Fortunately, 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,” said Isaah Mhlanga, chief economist at RMB,

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

The improvement in the forward-looking investment indicator is an encouraging sign and could lead to economic growth, but RMB cautioned that higher confidence is needed for this to materialise.

Speaking at a media luncheon last week, South African Reserve Bank Governor Lesetja Kganyago said that improving sentiment is not only a strong way to boost the economy but also free.

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