We’re not out of the woods until business confidence improves

There was a sigh of relief that the economy had avoided a technical recession in the first quarter of 2023 when Stats SA data showed growth of 0.4% compared with the fourth quarter of 2022.

While the positive news is welcome we must not lose the broader context — that many of the economic indicators still show a deteriorating trend, and the data is subject to significant revisions in a post-Covid world. 

One of the important indicators of future investment is business confidence, which has shown a declining trend for five consecutive quarters and reached a level of 27 in the second quarter, signalling that nearly three in four business executives are dissatisfied with prevailing business conditions.

This is enough for the sigh of relief to catch in our throats as we ask what is required to turn this grim situation around. Let’s dig into what the RMB/BER business confidence index shows beneath the headline 27 level.

The index covers five sub-sectors that are equally weighted — new vehicle dealers, retail traders, wholesale traders, manufacturing and building contractors. Three of these declined while two remained unchanged in the second quarter.

New vehicle dealer confidence plunged 21 points to 23, while retail confidence declined 14 points to 20, reflecting increased pressure on profitability and a worsening of business conditions that affected output. The confidence of wholesale traders declined by eight points to 32 as sales volumes of consumer goods came under more pressure.

All of these show that the consumer is under pressure from high interest rates, food price inflation and low job creation. The general mood in the country has also not helped lately due to negative geopolitical tensions.  

Of the two sectors that remained unchanged, manufacturing has the lowest level of confidence at 17 points, implying that eight out of 10 business executives are dissatisfied with prevailing business confidence. Load-shedding and inefficient logistics has been cited as key constraints.

Building contractors remaining unchanged at 43 points shows that though the construction pipeline might be improving on the back of renewable energy projects, there are other aspects that still hold confidence back. The construction mafias and their disruptive and costly activities might be one of the impediments.   

Given this low level of confidence we must refrain from any celebrations that might give policymakers reason to relax. The fact of the matter is that while we just skirted recession in the first quarter, the SA economy is far from being out of the woods. Historically, business confidence is key for economic growth. In fact, consecutive quarters of business confidence below 30 has historically coincided with contractions in either fixed investment or economic growth, or both.

We saw this in the mid-1970s, 1980s, early 1990s, the global financial crisis and during the Covid-19 pandemic, all periods associated with either political or financial crisis or natural disasters. That we are now at similarly low confidence levels while in relatively settled conditions must be a reason for concern.

Something must be done, and fast. It is encouraging that business met with the government earlier in the week. There is no other choice except to engage and solve these binding constraints, with collaboration between business and the state being paramount.   

What is required to lift confidence is first an improvement in SA’s strained geo-diplomacy, which will immediately compress part of the risk premium that was elevated due to concerns about secondary sanctions, which the Reserve Bank warned about in its Financial Stability Review.

An end to load-shedding, or at least a reduction to stage 3 on a sustained basis, as many corporates can now function at that level, would also help. As would solutions to SA’s logistics and crime problems.

Efforts to address these are not new; they are already under way in terms of Operation Vulindlela, whose recent update showed a 45% success rate. This needs to be improved significantly for business confidence, and therefore investment, economic growth and job creation, to have a chance of recovering.