Confidence levels among South African manufacturers improved by five points to 43 during the first quarter of the year on the back of better business conditions, financial services firm Absa's Manufacturing Survey shows.

The overall increase in business confidence is a reversal of two consecutive quarterly declines and was primarily supported by positive domestic and export sales, which have been sustained over the past four quarters.

“The [first-quarter] results show the sector is fairly upbeat, but there is some downside risk as the majority of the responses were received before the Russian invasion of Ukraine,” says Absa Retail and Business Bank manufacturing sector head Justin Schmidt.

“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. These factors may weigh on manufacturers’ confidence due to potentially higher production costs and further supply chain disruptions,” he notes.

After an extended period of excess capacity and suppressed investment in the sector, this quarter’s 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 by 12 points to the highest level in 11 years.

“This is extremely good news for the industry and shows capacity to grow into the future,” adds Schmidt.

“Positively, not only were manufacturers upbeat about overall fixed investment, but they also expect the levels of demand to improve over the next 12 months. The majority of manufacturers intend to invest in inventory as well as machinery and equipment in the coming year,” he says.

“However, despite higher output, the stock levels of finished goods relative to expected demand were still deemed as too low. In addition, the continued shortage of raw materials possibly results in producers meeting demand from existing stock and is inhibiting a ramp-up in production.”

Notably, numerous respondents flagged shortages of key input products and delays with especially imported products, owing to long lead times on sea freight, as a concern, he adds.

The quarterly survey covers about 700 business people in the manufacturing sector, and was conducted by the Bureau for Economic Research at Stellenbosch University.