The RMB/BER Business Confidence Index (BCI) slipped by two points to 31 in the fourth quarter of 2023. This means that less than a third of respondents to the survey were satisfied with prevailing business conditions. Business confidence was largely unchanged in three of the sectors, but a 15-point rise in retail confidence was outweighed by a steep 24-point drop in the confidence of new vehicle dealers, resulting in overall confidence edging down.
The business environment remained difficult in the fourth quarter, as business conditions deteriorated, against expectations. In addition, activity ticked down somewhat despite an ease in load-shedding relative to the third quarter. Sluggish demand means that there is likely increased pressure on turnover and profitability, with purchasing prices reaccelerating but selling prices slowing for a fourth consecutive quarter. While this is good news for the consumer as it may translate into lower consumer price inflation, this would have weighed on the confidence of businesspeople as they struggle to pass on higher input costs.
Details
The main drag on the overall RMB/BER BCI came from a 24-point decline in business confidence among new vehicle dealers. Confidence declined to just 6 index points, which is the lowest level since 2020Q2 – the strictest phase of South Africa’s COVID-19 lockdown. The sector is struggling in the face of very weak local demand with consumer income under pressure amid high borrowing costs. Traders report on very high inventory levels.
The only other sector to report a decline in confidence was wholesale, albeit a much smaller downtick and staying at a more elevated level. Confidence fell from 38 to 36 index points in the fourth quarter as sales volumes continued to move lower.
Following a two-point decline in Q3, confidence among building contractors was unchanged at 41 in the fourth quarter. The activity indicator suggests that the growth momentum is still going, albeit somewhat slower compared to the last few quarters. There is a risk that confidence in the residential sector could fade in coming quarters as high borrowing costs hurt demand in the residential property sector.
While remaining at a very subdued level relative to most other sectors, manufacturing business confidence ticked up to 26 index points in 2023Q4. This is the highest level this year, with confidence averaging a mere 19 points during the first three quarters of the year. The increase was supported by an improvement in domestic and particularly export demand, as well as higher production volumes amid less frequent and less intense load-shedding. Manufacturers remain pessimistic about business conditions going forward and scaled back investment outlays further.
The most positive development was the 15-point surge in confidence among respondents in the retail sector. Following two straight declines in the first and second quarter of the year, confidence recovered through the second half, to end the year at 47 index points (equal to the average reading in 2022). However, the underlying survey results warrant some caution as overall sales volumes slowed with the non-durable retailers reporting the steepest decline. Some non-durable goods have seen steep price increases of late, which tends to depress volume growth.
Bottom line
Real GDP growth likely slowed in the third quarter of 2023 and the survey results do not point to a meaningful reacceleration in momentum in Q4 as activity remained subdued. Beyond poor activity growth, the business environment remained tough and trading conditions did not improve as respondents had hoped for last quarter. Respondents lamented logistical challenges, ranging from delays at the harbours to dealing with potholes, while crime and corruption also remained top of mind. Some respondents also remarked that they struggle to receive timely payment for goods delivered, with knock-on implications for their production process.
As highlighted by Isaah Mhlanga, Chief Economist and Head of Research at RMB, “structural supply constraints around infrastructure and electricity remain a key challenge to operating in the South African business environment. However, the decline in the RMB/BER Business Confidence Index also reflects underlying demand weakness. The best example being the depressing outcomes for the interest-rate-sensitive new vehicle dealers this quarter, but local sales volumes remained sluggish across the board”. Without a sustained recovery in demand, it will be difficult for production growth to accelerate, which is needed to stimulate (non-energy) investment and employment growth.
[1] The fourth quarter survey was conducted by the BER between 25 October and 13 November. The survey covered 1 050 senior executives in the building, manufacturing, retail, wholesale, and motor trade sectors.
