South African companies spend billions to say goodbye to government service

Capital expenditure from South African companies has risen to a high last seen in December 2017. It is driven by electricity, gas, and water expenditure, reflecting the need for alternatives to government-derived services. 

This is from Momentum Investments’s Business Pulse for the second quarter of 2023, where its research team commented on recently released economic data. 

In the first quarter, the highest growth was recorded in electricity, gas and water supply, which increased 42% from the fourth quarter of 2022.

Expenditure by the manufacturing sector also skyrocketed, rising by 39% compared to the previous quarter. 

The growth in trade and mining expenditure was more subdued, albeit substantial, with increases of 19.5% and 16.3%, respectively. 

The biggest contraction was in personal services, with expenditure plummeting by 27.3%, followed by construction which decreased by 25.3% compared to the previous quarter.

As seen in the graph above, capital expenditure in the electricity and mining sector was driven by vehicle purchases. 

Vehicle purchases increased across all sectors. However, the construction sector’s building and new equipment decline outweighed vehicle purchases.

The South African Reserve Bank reported an increase of 1.3% quarter-on-quarter in real gross fixed capital formation (GFCF) in the fourth quarter of 2022. 

This was attributable to private businesses and the general government, which increased their GFCF by 1.5% and 2.5%, respectively. 

On an annual basis, GFCF grew by 4.7% in 2022 compared to 0.2% in 2021, marking the second positive outcome following five consecutive years of contraction. 

While 2022 recorded decent growth, the SARB notes that real GFCF is still 10.4% lower than in 2019 in level terms.

On average, industries face higher cost pressures compared to the period between the global financial crisis and the COVID-19 pandemic. 

This may likely be influenced by the impact of the supply chain bottlenecks during the pandemic and the rising costs incurred to mitigate the impact of load-shedding. 

Although supply chain bottlenecks have alleviated globally, we will likely see high-cost pressures affecting business margins as load-shedding persists. 

These pressures will lessen in the event of consistently lower levels of load-shedding.