Global Courant
Sentiment in the manufacturing sector remains subdued – coming down to levels similar to those seen during the worst of the Covid-19 pandemic and lower than during the global financial crisis.
Absa’s most recent Manufacturing Survey for Q2 showed that load shedding is the main driver of weak industry sentiment.
Historical data shows that confidence has only been at this level a few times.
“Confidence levels in the second quarter were unchanged at 17 since the previous quarter – down from the low of 20 reached during the global financial crisis,” said Absa.
“Disruptions to the electricity supply not only weigh directly on production and capacity and hurt profitability due to the costs associated with measures to reduce load (such as diesel generators), but also negatively affect sentiment,” says Justin Schmidt , head of the production sector at Absa Relationship Banking.
“With confidence levels remaining at the very low level seen in the first quarter, the effects of the divestiture are visible across all manufacturing sub-sectors.”
Absa’s quarterly survey, in collaboration with the Bureau for Economic Research (BER), takes into account the sentiment of 700 entrepreneurs in the manufacturing industry.
The confidence index ranges from zero to 100, where zero represents an extreme lack of confidence and 100 represents extreme confidence where all participants are satisfied with current business conditions.
The bank said a tough economic environment continues to constrain household disposable income, leading manufacturers to face not only a reduction in sales volumes, but also a slowdown in price inflation related to sales prices in both local and international markets.
“Compared to the first quarter, domestic sales and domestic sales price per unit of production decreased by 22 and 19 points, respectively, while export sales showed a decrease of 15 points and export sales price per unit of production decreased by 14 points. Further evidence of the impact of load shedding is visible in lower production levels and increased capacity underutilisation.”
“As the intensity of shutdowns remains high, the costs of shutdowns in the form of both production downtime and diesel purchases for generators are putting pressure on margins,” said Schmidt.
Manufacturers in general are pessimistic about future business climate expectations. Absa said a record majority of manufacturers expect business conditions to deteriorate further over the next 12 months.
“In the near term, business conditions are likely to worsen as greater tax cuts are expected during the winter season. However, the silver lining is that as additional generation capacity comes online, longer-term business conditions will improve,” Schmidt said.
“Manufacturing remains vital to the growth of the South African economy… Given the current energy crisis facing the country, manufacturers’ investments are focused on staying in business, while investments in additions or expansions are suspended” Schmidt added.
The chart below illustrates the fluctuation in manufacturers’ confidence in the business environment:
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