South Africa’s business confidence is growing on the back of rising export sales, although demand for finished manufactured goods continues to outstrip supply due to a shortage of raw materials.
This is according to the Q1 Absa Manufacturing Survey, which revealed that overall business confidence increased by five points to 43 during the quarter, a positive reversal after two consecutive quarterly declines. This was mainly supported by positive domestic and export sales, which have been sustained over the past four quarters. The quarterly survey, which covers approximately 700 businesspeople in the manufacturing sector, was conducted by the Bureau for Economic Research (BER) at Stellenbosch University from February 9-28.
“The results show that the sector is fairly upbeat, but there is some downside risk as the majority of the survey responses were received before the Russian invasion of Ukraine. Although the official statistics for January and February were better than expected, the possibility of renewed pressure on still-strained global supply chains, and more importantly, increased prices of raw materials such as oil and agricultural commodities, were likely not considered by most respondents,” the survey noted.
Absa said these factors could weigh on manufacturers’ confidence due to potentially higher production costs and further supply chain disruptions.
However, the Q1 indicator for fixed investment levels increased by six points to the highest level since the fourth quarter of 2007, while investment intentions for the coming 12 months increased 12 points to the highest level in 11 years. This followed an extended period of excess capacity and suppressed investment in the sector.
“The majority of manufacturers noted an intention to invest in inventory as well as machinery and equipment in the coming year. This is extremely good news for the industry and shows capacity to grow into the future. Positively, not only were manufacturers upbeat about overall fixed investments, but they also indicated an expectation of improved demand levels over the next 12 months,” the survey said.
However, despite higher output levels, the stock of finished goods relative to expected demand was still deemed too low by the majority of manufacturers. The continued shortage of raw materials, exacerbated by the Russia-Ukraine war, could result in manufacturers being forced to meet the demand from existing stock as opposed to being able to ramp up production levels, the survey noted.
“Numerous respondents flagged shortages of key input products and delays with especially imported products, due to long lead times on sea freight, as a concern. As manufacturers have been dealing with supply chain disruptions for the past two years, we don’t expect the war to be a major shock for South African manufacturers when compared to the Covid-19 pandemic, provided that there are no significant developments and the war is not drawn out for an extended period.”
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 the current business conditions.
