By Thebe Mabanga
Business confidence took a knock in the second quarter of this year on the back of higher energy prices and expectations that interest rates could increase.
The RMB/BER Business Confidence Index fell from 47 in the first quarter to 39 in the second quarter as the US/Iran war disrupted supply chains, pushed up oil prices and heightened uncertainty.
The decline takes the index below its long-term average level of 40, but it remains well above the level of 27 reached in the second quarter of 2023, when the South African economy was in the grip of load-shedding.
The survey was conducted from 14 to 25 May, when the operating environment had changed markedly from the first-quarter survey, which was conducted before the escalation in the Middle East.
RMB/BER said the shift in the global environment had changed expectations for South Africa’s interest-rate trajectory.
Markets had previously expected about three 25-basis-point cuts over the next year, but the outlook has since shifted towards the possibility of two to four 25-basis-point hikes.
The South African Reserve Bank raised the policy rate by 25 basis points after the survey period, taking the repo rate to 7% from 29 May.
“The decline in business confidence during the second quarter is disappointing, particularly after the encouraging improvement recorded over the preceding two quarters. However, the setback is not unexpected given the sudden deterioration in the global environment, even though there was no material weakening in South Africa’s domestic fundamentals,” said Isaah Mhlanga, Chief Economist at RMB.
Mhlanga noted that the escalation of tensions in the Middle East has meant that businesses have had to adjust quickly in an unsupportive environment.
“While the external shock has interrupted the recovery in sentiment, it has not necessarily derailed it,” said Mhlanga. “Much will depend on whether geopolitical tensions ease and whether domestic reform momentum can continue to support growth and investment.”
Four of the five sectors that make up the headline index recorded lower confidence in the second quarter, signalling widespread uncertainty, especially among consumer-facing and rate-sensitive sectors.
The BER found that the largest decline was among new vehicle dealers, where confidence fell by 18 points from a high of 67 to 49. This suggests that consumers are likely to put off new car purchases until there is clarity on the duration of the war and its impact on oil prices, inflation and interest rates.
“The decline was accompanied by weaker sales volumes, suggesting that the earlier rapid momentum in vehicle demand has started to fade,” the BER said.
Car dealerships were followed by wholesalers, where confidence fell 10 points to 40. The survey noted that a fall in consumer goods sales was responsible for the sharp decline.
This also filtered through to retail confidence, which declined by five points to 31. The BER noted a decline in durable and semi-durable goods, again reflecting a reduction in discretionary spending and delays in big-ticket purchases.
Building contractor confidence fell by four points to 46, after improving in the first quarter, as both residential and non-residential building activity came under pressure.
Manufacturing was the only sector to record an improvement, albeit marginally, rising by one point to 31.
“Domestic sales were unchanged at a weak level, although some export-related indicators improved. A surge in production costs has left the sector facing a challenging operating environment,” said the BER.
Provincially, the deterioration was concentrated in Gauteng and KwaZulu-Natal, with confidence declining by 15 points to 26 in Gauteng and by 17 points to 40 in KwaZulu-Natal.
By contrast, confidence in the Western Cape increased by five points to 55, making it the only major province to record an improvement.
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