ECONOMIC OWN GOALS
SA business confidence in Q2 2023 collapses to lowest level since 2020 – RMB
As winter sets in and power cuts ramp up, a fresh chill has seeped into the bones of South African business. The RMB/BER Business Confidence Index (BCI) fell nine points in the second quarter (Q2) of 2023 to 27, its lowest level since 2020 when the economy was in Covid meltdown mode. A recession has been narrowly dodged, but that may be as good as it gets for a while.
It was the fifth consecutive quarter that the BCI fell, a decline that is pretty much directly linked to the rise in rotational power cuts to prevent a collapse of the national grid. It all boils down to the basic fact that without a reliable supply of power, business in an industrialised economy simply cannot prosper and have confidence in prevailing conditions. And without confidence, it is not going to make significant investments or create new jobs.
“A challenging business environment amid, among other factors, persistent load shedding, rising interest rates and cost pressures weighing on profitability… affected confidence,” RMB said in a statement.
The biggest declines were recorded by new vehicle dealers and retailers who are at the coalface of consumer sentiment in these tough times. New vehicle dealer confidence tanked 21 points to 23, strongly suggesting that rising interest rates to contain inflation are making consumers think twice before seeking finance for a new car. Or at least that seems to be the perception in the showroom even if new vehicle sales have been surprisingly resilient in the year to date.
Meanwhile, retail confidence fell 14 points to 20.
“Traders in non-durable goods (food, beverages, etc) struggled the most amid a steep decline in sales volumes,” RMB said. Food inflation in April was 14.3%, only marginally slower than the 14-year high of 14.4% recorded in March, and that is clearly curbing caloric demand.
But for some retailers, the power cuts have had a silver lining. What Eskom breaks, the consumer must replace.
“There were diverging trends within the durable goods sector as hardware traders were under pressure, but furniture and appliance sales have been supported by load shedding essentials and replacement purchases of electronics broken due to load shedding and power surges,” RMB said.
Manufacturing confidence remained at the bottom of the barrel, unmoved at a paltry 17, meaning that less than two out of 10 respondents in the sector were satisfied with prevailing business conditions.
All business sectors face rising costs to keep the lights on. Combined with the rand’s recent collapse, this is stoking the flames of inflation, which, at 6.8%, remains above the upper band of the South African Reserve Bank’s (Sarb) 3% to 6% target range, despite 10 straight rate hikes to douse the embers.
The Sarb estimates that the additional costs to business linked to the power crisis are adding 0.5 of a percentage point to headline inflation.
Small wonder that confidence is evaporating like the Johannesburg morning dew on a bright day.
South Africa’s economy narrowly dodged the recession bullet when it grew 0.4% quarterly in the first three months of this year after contracting 1.1% in Q4 of 2022
Read more in Daily Maverick: SA consumer inflation slows to 11-month low of 6.8%, but Reserve Bank still expected to hike rates
But the BCI is the latest indicator that this small rebound is losing steam and the economy may be contracting again.
The Absa Purchasing Managers Index (PMI), a key barometer of confidence in the manufacturing sector, declined in May to 49.2 from 49.8 in April, meaning it has been stuck in negative territory this quarter.
Read more in Daily Maverick: Absa PMI falls further into negative territory in May
The BankservAfrica Economic Transactions Index – a measure of economic transactions between South Africa’s banks – slipped further in May, signalling a decline in economic activity.
“It remains unclear as to what will meaningfully lift confidence over the short term, especially as load shedding could get worse over the winter months,” said RMB chief economist Isaah Mhlanga.
“Indeed, while just skirting a recession in the first quarter of 2023, the South African economy is far from being out of the woods… more concerning is the fact that consecutive quarters of business confidence below 30 have historically coincided with contractions in either fixed investment, economic growth or both.”
The bottom line is that South Africa may still fall into a recession in 2023, and it will be peppered with own goals. DM