After flagging a bumpy road in our last report, the country’s economic activities are already confirming a challenging road ahead. While we can take some encouragement from the marginal improvement, in both demand constraints and supply constraints, restrictions are firmly rooted at their current high levels due to economic uncertainty. Inflation remains a big driver and is pushing up labour and energy costs while other challenges relate to access to finance, availability of skills, regulations and red tape.

Victor Sekese

Victor Sekese

  • Chief Executive

Grant Thornton’s International Business Report (IBR) tracks sentiments among global mid-market business leaders. The IBR provides a complete view of the health and prospects of mid-market companies – those employing between 50 and 500 staff - at a global, regional, country, and sector level. In South Africa, approximately 100 business leaders, including chief executive officers, managing directors, chairpersons, and other senior decision-makers from various industry sectors, were surveyed in the second half of 2022.

Faced with high levels of economic uncertainty, optimism among EMEA (Europe, Middle East and Africa) mid-market businesses has fallen seven percentage points to 46% (down from 53% in the first half of 2022). This compares to the 59% of mid-market businesses globally that are optimistic about the outlook for their economies (down from 64% in the first half of 2022).

According to the South African Reserve Bank data, the country's Gross Domestic Product (GDP) growth rate in 2022 was 1.6% in the third quarter compared to 0,7 in the second quarter. Although this is low, the increased growth rate had a positive impact on mid-market businesses, as it led to an increase in consumer spending for the fourth quarter of 2022. In line with trends highlighted in H1 2022, 74% of mid-market businesses see energy costs as a major issue due to loadshedding and high cost of diesel, compared to 47% of those surveyed pre-pandemic, causing some businesses to close down and adding to the already high unemployment rate and financial constraints.

The other concerning aspect of the results is that 67% of mid-market businesses believe that economic uncertainty is another major constraint in growing their business. The International Monetary Fund (IMF) states that global economic activity is slowing down more broadly and sharply than expected, with inflation higher than it has been in several decades. The cost-of-living crisis, tightening financial conditions in most regions, Russia's invasion of Ukraine, and the lingering effects of COVID-19 pandemic all loom large in the forecast for the next 12 months. Mid-market businesses would need strategies such as resilience planning and dealing with the components that businesses can control such as managing cash flow.

Index Overview

The overall index results for South Africa shows a significant increase from 0.5 points in the first half of 2022 to 3.5 points in the latter part of 2022. The latest South African data shows that mid-market businesses' optimism for the country's economy over the next 12 months has dropped from 56% in H1 2022 to 52% in H2 2022, but it is still higher than it was during the Covid-19 pandemic. This could be because organisations expect most things to remain positive - at least where they have some control such as profitability, investment, etc., but the biggest dip is in general optimism about what is going on around such as inflation, geopolitical situations and energy crisis.

The Index

Uncertainty has increased to 68.7 in South Africa in H2 2022 compared to the rest of the globe, which has remained in the lower 60 points area for H1 and H2 2022 (63.3 points and 60.7 points respectively).

Demand Constrains moderated globally in H2 2022 compared to H1 2022, while there was an improvement in South Africa from -47.5 points to -41.6 points.  However, optimism is volatile, and on the downside compared to the 2021 H1 survey. While economic outlook expectation for the next 12 months has heightened across all the regions.

Economic Outlook expectation for the next 12 months has heightened. Conditions appear good buoyed by business expectations on revenues & profitability and no changes in supply constraint.

Outlook over the next 12 months

We anticipate an improvement in the outlook over the next 12 months, particularly in terms of investment and economic conditions. This despite President Cyril Ramaphosa’s announcement that the country is now in a State of Disaster on electricity and that he will appoint the Minister of Electricity.

The Minister of Electricity will deal with the electricity crisis by expediting energy projects and limiting regulatory requirements while maintaining strict environmental safeguards, procurement principles, and technical standards.  It will be evaluated in the H1 2023 report whether the President's announcement has had a significant effect on the country's economic outlook.

However, mid-market businesses need to cushion themselves against a prospective recession if revenue growth is to be realised. SNG Grant Thornton has vast experience and expertise in providing advisory services to businesses going through investment and adoption journeys to ensure growth.

The most alarming components are shown in red in the figure below, while the index’s positive components are shown in green. Optimism among mid-market businesses in South Africa has fallen four percentage points to 52% (down from 56% in the first half of 2022). Despite the fall, optimism remains above the 2021 levels and historic averages, indicating businesses’ hope for a return to normality. Demand constraints have been moderated, which are affected by energy costs and economic uncertainty. Conditions appear good buoyed by business expectations on revenues and profitability, mainly linked to an anticipation of improvement in selling prices as well as hopes to export more, which will increase non-domestic sources of revenue.

THE JOURNEY AHEAD

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    South African Business - H2 2022 Report

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