Isaah Mhlanga, chief economist at RMB, said that the decline in business confidence during the second quarter is disappointing, particularly after the encouraging improvement recorded over the preceding two quarters.
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South African business confidence fell sharply in the second quarter of 2026 as escalating geopolitical tensions in the Middle East, rising fuel prices and growing expectations of higher interest rates dampened sentiment across most sectors of the economy.
The latest RMB/Bureau for Economic Research (BER) Business Confidence Index, released on Tuesday, showed that confidence declined by eight index points to 39, reversing gains recorded over the previous two quarters and slipping below the long-term average of 40.
The survey, conducted between 14 and 25 May, captured a significant deterioration in the operating environment for businesses compared with the first quarter, as the fallout from the US-Iran conflict began to filter through to global and domestic markets.
According to the report, escalating tensions in the Middle East pushed oil and fuel prices higher, contributing to a dramatic shift in expectations for South Africa's monetary policy outlook.
“During this period, the operating environment for firms deteriorated meaningfully from the first-quarter survey (conducted before the US-Iran war) as tensions in the Middle East escalated, driving oil and fuel prices higher,” the report stated.
The survey noted that financial markets had previously anticipated further interest rate cuts this year. However, rising inflation risks have altered expectations considerably.
“Markets had previously expected further monetary policy easing, including around three 25 basis-point cuts; attention has since shifted to the possibility of between two and four rate hikes of 25 basis points each.”
The South African Reserve Bank subsequently raised the repo rate by 25 basis points after the survey period, reinforcing concerns about tighter financial conditions.
The decline in confidence was widespread, with four of the five sectors included in the survey reporting lower sentiment levels.
New vehicle dealers experienced the sharpest decline, with confidence dropping by 18 points to 49.
“New vehicle dealers remained the most confident sector despite the sharp decline in sentiment from the elevated level reached in the first quarter. The decline was accompanied by weaker sales volumes, suggesting that the earlier rapid momentum in vehicle demand has started to fade,” the report stated.
Wholesalers also reported a significant deterioration, with confidence falling by 10 points to 40. Consumer goods sales volumes declined sharply, reflecting growing pressure on household spending.
Retailers remained under strain, with confidence dropping by five points to 31 after already weakening in the previous quarter.
The survey found that retail sales volumes, particularly for semi-durable and durable goods, had fallen sharply as consumers became more cautious about discretionary spending.
Building contractors were not spared, with confidence easing four points to 46. Activity levels weakened in both residential and non-residential construction, reversing some of the gains achieved earlier this year.
Manufacturing was the only sector to register an improvement, albeit marginally. Confidence edged up by one point to 31, although the report cautioned that the sector continues to face weak demand and rising production costs.
Isaah Mhlanga, chief economist at RMB, said that the decline in business confidence during the second quarter is disappointing, particularly after the encouraging improvement recorded over the preceding two quarters.
However, Mhlanga said the setback is not unexpected given the sudden deterioration in the global environment, even though there was no material weakening in South Africa's domestic fundamentals.
“The sharp escalation of tensions in the Middle East pushed oil prices higher, lifted local fuel costs and significantly altered interest-rate expectations. Businesses have had to adjust quickly to a less supportive outlook, which weighed on sentiment across most sectors,” Mhlanga said.
“While firms continue to grapple with familiar domestic challenges, there is little evidence that these issues deteriorated further. Instead, many respondents indicated that uncertainty had increased and that clients had become more cautious about spending and investment decisions.”
Mhlanga said the second-quarter survey suggests that businesses have become more cautious rather than outright pessimistic. He said firms appear to be reassessing the outlook in response to a more uncertain global environment and the prospect of higher inflation and interest rates.
According to Mhlanga, a renewed improvement in confidence will depend on some easing in geopolitical tensions, a stabilisation in oil and fuel prices, and greater certainty about the interest-rate path.
“While the external shock has interrupted the recovery in sentiment, it has not necessarily derailed it,” Mhlanga said. “Much will depend on whether geopolitical tensions ease and whether domestic reform momentum can continue to support growth and investment.”
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