CONFIDENCE levels in the manufacturing sector remain near the low points reached during previous business cycles, as load shedding weighs on sentiment, the Q2 Absa Manufacturing Survey shows.
Although sentiment has improved significantly since the record low recorded during the pandemic (5 points), historical data show that confidence has only been at these levels a handful of times (see graph below). The Q2 confidence level was unchanged at 17 since the previous quarter – lower than the trough of 20 reached during the global financial crisis.
“Electricity supply disruptions not only directly weigh on production and capacity, and hurt profitability due to the costs associated with load shedding mitigation measures (such as diesel generators), but also negatively impact sentiment,” said Justin Schmidt, Head of Manufacturing Sector at Absa Relationship Banking. “With confidence levels remaining at the same very low levels seen in the first quarter, the effects of load shedding are visible across manufacturing subsectors.”
The quarterly survey, which covers approximately 700 businesspeople in the manufacturing sector, was conducted by the Bureau for Economic Research (BER) at Stellenbosch University between 10 and 30 May 2023. The confidence index ranges between zero and 100, with zero reflecting an extreme lack of confidence and 100 extreme confidence where all participants are satisfied with current business conditions.
As the tough economic environment continues to constrain household disposable income, manufacturers are not only faced with a reduction in sales volumes but are also seeing a slowing of price inflation with regard to selling prices in both the local and international markets. Compared to the first quarter, domestic sales and the domestic selling price per production unit dropped by 22 and 19 points respectively, while export sales showed a 15-point decline and export selling price per production unit dropped 14 points. Further evidence of the impact of load shedding is visible on the lower levels of production and the increased level of capacity underutilisation.
“As the intensity of load shedding remains high, the cost of load shedding in the form of both production downtime and diesel purchases for generators are causing margin pressure,” Schmidt said.
Unfortunately, forward-looking expectations also highlight significant pessimism – a record majority of manufacturers expect that business conditions will deteriorate further over the next 12 months.
“In the short term, business conditions are likely to worsen as there is an expectation of increased load shedding during the winter season. However, the silver lining is that as additional generation capacity comes online, business conditions will improve over the longer term,” Schmidt said.
“Manufacturing remains vital to the growth of the South African economy as evident by the growth recorded in the Q1 2023 GDP figures released by Stats SA. Given the current energy crisis faced by the country, manufacturers’ investments are focused on remaining in operation while investments into additions or expansions remain on hold,” Schmidt added.
