The Rand Merchant Bank (RMB)/Bureau for Economic Research Business Confidence index (BCI) decreased by five points to 40 in the second quarter of the year, after the recovery that started in the first half of 2024 stalled in the first quarter.

This implies that only four out of ten business respondents in the most cyclically sensitive sectors of the economy were satisfied with prevailing business conditions, with the majority of respondents pessimistic about trading conditions.  

RMB chief economist Isaah Mhlanga says while business confidence is still above the average of 2023 and 2024, it is now below the long-term average level, which points to a loss of momentum in the economy

Given the sensitive period during which the second quarter survey took place – May 7 to 27 – in respect of tense diplomatic relations between South Africa and the US, respondents flagged global trade uncertainty as among the negative factors impacting their businesses, in addition to continued local logistics issues.

Additionally, the rand exchange rate experienced a volatile quarter, weakening past R19.90 to the dollar early in April but clawing its way back to below R18 to the dollar during the survey period. Many surveys were also returned before the tabling of the national Budget on May 21, hence certain respondents were uncertain whether a value-added tax hike would ensue.

Moreover, there were also mixed messages about the Democratic Alliance’s continued participation in the Government of National Unity, with fears of an imminent collapse of this government only easing later in May.

The BCI recorded declines in four of the five sectors it monitors, barring wholesale trade confidence. The second-quarter confidence print was driven by declines in four of the five sectors, partially offset by a sharp increase in wholesale trade,

While having been the only sector to register an increase in confidence, wholesale trade also had the highest sentiment reading at 50 points. RMB explains non-consumer wholesale traders appear to have fared well during the second quarter, but consumer goods traders suffered and faced a sharp drop in sales.

“This is a worrying sign for consumer demand in the second half of the year, despite supportive macroeconomic factors such as low inflation, interest rate cuts, and two-pot pension fund payouts,” Mhlanga states.

For now, business conditions in the retail trade sector remain largely in line with the long-term average, although confidence deteriorated by eight points to a level of 42.

In turn, motor trade confidence decreased by ten points to 42 in the second quarter, with respondents remaining fairly upbeat about business conditions and sales volumes.

RMB says the 25 basis point reduction in the policy interest rate – which took place after the survey period but was largely expected – could provide some further support in the third quarter, although this is countered by an increased personal tax burden.

Building contractors in the residential sector have not yet benefited from past rate cuts, and the cut last week may also be insufficient to turn their fortunes around.

According to the second quarter results, activity in this segment came under further pressure, which weighed on sentiment. Non-residential contractors fared better, but overall confidence among all building contractors declined by ten points to an almost three-year low of 35 points.

Despite a notable deterioration in business conditions, confidence in the manufacturing sector remained virtually unchanged at a low 33 points.

Manufacturers reported a decline in domestic and export demand, leading to a drop in production. Many of the constraint indicators, including the general political climate, rose in the second quarter.

Looking ahead, Mhlanga expects the reduction in the repo rate to provide some relief for businesses, but he says more is needed to spark the South African economy.

“There is arguably more certainty on the local political front, but the global environment will remain uncertain,” he adds.

He suggests that an easing of tension between US and South African relations would support business confidence in the next BCI cycle.

“The core of South Africa’s long-term economic recovery and resilience remains faster implementation of structural economic reforms. Without these reforms, the economy will remain vulnerable to global economic shocks and too slow to reduce the social ills that burden many with unemployment, poverty, and inequality.

“The launch of the second phase of Operation Vulindlela shows that the government remains committed to economic transformation through economic reforms, with implementation the next hurdle,” Mhlanga concludes.