South Africa’s private sector economy has signalled a concerning shift towards fragility, as evidenced by the latest S&P Global Purchasing Managers’ Index (PMI).
The PMI, which serves as a composite indicator of operating conditions in the private sector, revealed a notable decline on Thursday, dropping from 50.8 in May to 50.1 in June.
This reading, while remaining barely within the expansion territory, raises red flags as business confidence plummeted to its lowest point in nearly four years.
The PMI serves as a crucial economic barometer; readings above 50 indicate an improvement in business conditions compared to the prior month, while readings below this threshold reflect deterioration.
This S&P economic indicator corresponds with the Absa PMI released on Tuesday, which showed that the economy remained in contractionary territory for the eighth consecutive month, despite the index rising by 5.4 points to reach 48.5 in June from 43.1 in May.
With the June figure hovering just above the critical 50.0 mark in the S&P PMI, early signs of a potential economic downturn are evident.
The PMI’s underlying components painted a mixed picture: a decline in output and new business volumes contrasted with increases in stock levels and workforce size.
In June, output levels across the private sector declined for the first time in three months, signalling a significant setback from the previous month when growth surged to a four-year high.
Although this reduction was marginal, it marked the first contraction in activity since March, with weakness spanning nearly all sectors, except for services.
Furthermore, new business volumes experienced their first decline since March, which can be attributed, at least in part, to a continued downturn in export orders, suffering a third consecutive monthly contraction.
Amid these troubling economic signs, South African firms have displayed waning confidence in the outlook for business activity.
The level of optimism dropped sharply, reaching its lowest point in close to four years.
A noticeable decline in the proportion of firms expecting output growth from May significantly contributed to this drop. Factors such as ongoing domestic and foreign policy uncertainties have undermined optimism, despite positive influences from project starts and efforts to reach new clientele.
David Owen, senior Economist at S&P Global Market Intelligence, said the drop in business expectations to their lowest since July 2021 showed that firms were growing increasingly nervous about the domestic and non-domestic economic outlook.
“Nevertheless, the survey data suggests that companies were still willing to expand their headcounts and store more inputs, helped by a relatively benign (albeit quickening) cost environment.”
“And whilst the headline PMI dropped to 50.1 in June, eroding much of the growth in private sector conditions seen during May’s six-month high, this was still a higher reading than those recorded in the first quarter, adding to estimates of a solid up turn in Q2 GDP.”
On a brighter note, employment data from the PMI revealed a modest increase in workforce numbers for the second time in three months.
This rise, the most pronounced since May 2024, was chiefly driven by growth in the service sector. Additionally, the supply chain environment showed improvement, marking the longest stretch of enhanced supplier conditions in nearly nine years.
This uptick is attributed to reductions in port disruptions and lower input demands, although the decrease in lead times remains minimal.
Despite these positive developments, June saw intensified cost pressures across the South African economy, with input prices climbing at a solid pace.
All sectors reported increases in costs, although it was the wholesale and retail sectors that experienced the most severe inflation rates.
This increase in expenses can be linked to rising purchase prices and staffing costs, the latter of which experienced notably higher-than-average growth.
Interestingly, though cost pressures mounted, the increase in selling prices remained modest, as businesses sought to balance the need to pass on costs with the realities of heightened competition.
Encouragingly, reports indicated that a stronger rand allowed some firms to reduce their prices.
BUSINESS REPORT
