Tenuous domestic and global economic conditions continue to weigh on the business confidence of domestic manufacturers, with 26% and 49% of those polled as part of industry body, the Manufacturing Circle’s (MC’s) Manufacturing Business Confidence Index describing business conditions in the third quarter of this year as “poor” and “weak” respectively.

Only 17% believed that conditions were stable during this period, while a modest 7% described business conditions as either “modest to good” or
“strong”.

The third-quarter results also represented a deterioration in the outlook on business conditions from the third quarter of the prior year, as only 7%
of the respondents perceived business conditions to be “good”, compared with 12% in 2014.

The South African business confidence index continued the downward trend that started in the first quarter of the year, decreasing by ten index points, from 48 in the second quarter to 38 in the third quarter – signalling its lowest level since the fourth quarter of 2011.

The manufacturing subindex picked up marginally to 34 index points from 29, after falling for three consecutive quarters.

“Historically, whenever this business confidence index falls below 30, it signals a looming recession and, therefore, there is reason to worry, as an index of 38 is not very far from 30,” said the MC.

The surveyed manufacturers that viewed business as stable, however, increased from 10% in the third quarter of the prior year to 17% in the three months under review.

“Poor domestic and global economic conditions are responsible for the surveyed manufacturers’ negative sentiments. China’s economic conditions, which include lacklustre growth and weaker demand for commodities, in particular, had negatively impacted on South African businesses and on the rest of the world.

“Some respondents indicated that, owing to the generally muted global demand, Chinese producers are lowering their prices even further to become competitive, resulting in more cheap imports entering the South African market to the detriment of local producers,” read the survey.

Respondents further identified the volatile exchange rate, labour unrest, rigid labour laws, as well as the current drought, as presenting challenges in the business environment.

Moreover, energy utility Eskom’s continued inability to provide the country with a reliable electricity supply continued to emerge as a reason for the dampened business confidence, while concerns were also raised at the uncertainty surrounding new tax laws.

The 2015 third-quarter average of the Barclays Purchasing Managers’ Index of 49.8 index points showed that conditions in the manufacturing sector remained fragile amidst the country’s struggling economy, which saw gross domestic product growth contracting by 1.3% in the second quarter of the year.

On the demand side, the local market remained the main market for manufacturers, according to the survey, as over half of the respondents indicated that more than 80% of their output was sold locally in the third quarter, while a further quarter of the manufacturers indicated that between 60% and 80% was sold locally.

With respect to the foreign market, 21% of the respondents said that over 40% of their output was exported, while only 14% said that that they did not sell to the foreign market during the third quarter.

On the supply side, total input costs went up for around 75% of the survey respondents, while only just over a tenth indicated that there was a decrease in total costs.

“It is not surprising that imported input costs have been rising, since the country’s exchange rate remains weak and a good portion of the increase in these costs can be attributed to the weak rand.

“This places a heavy burden on manufacturers, as almost 70% indicated that imported input cost made up to 40% of their total input costs, while about 20% indicated that it made up more than 40% of their total costs.

Looking ahead, surveyed manufacturers largely expected business conditions to remain “poor” and “fragile” or “weak” on the back of continued slow growth, dampened local demand, low commodity prices and a lack of adequate skills.