The IHS Markit South Africa Purchasing Managers’ Index (PMI) fell below the neutral 50 point territory in December to 48.4, from 51.7 in November, which signalled a modest decline in business conditions that was broadly comparable with the strike-hit period in October, although firms predict a recovery in output over 2022.

South African companies saw a renewed downturn in activity during December, the data showed, as concerns about the rapid increase in Covid-19 cases from the Omicron variant and tightened travel measures hit overall demand.

Supply chains were also affected, while higher prices for a number of inputs continued to drive costs up sharply, IHS Markit said on January 5.

"Despite the government's decision to keep Covid-19 measures at Level 1, business activity in South Africa fell sharply in response to the Omicron wave during December. Firms were hit by a loss of consumer confidence and renewed travel restrictions from around the world to try and contain the virus’ spread," said IHS Markit economist David Owen.

Activity levels fell at a sharp pace at the end of the year, which businesses largely attributed to a renewed decline in sales.

In the wake of a sharp rise in Covid-19 cases linked to the Omicron variant, firms noted that clients were less willing to spend and that international travel restrictions had weakened tourism.

That said, while the overall fall in output was the fastest in five months, it was notably softer than those recorded in July and the middle of 2020 when strict domestic Covid-19 measures were applied. Similarly, new orders fell sharply but at a slower rate than in those periods.

Nevertheless, firms were largely optimistic that the economy would recover from the latest wave, contributing to a strong 12-month outlook and fairly stable job numbers, IHS Markit said.

A number of survey respondents stated that they expect disruption from the Omicron wave to be short-lived. As a result, despite slipping to a four-month low, the outlook for future activity remained strong and above the series trend.

Job numbers were also largely unaffected, with survey data signalling only a fractional drop in employment that was often linked to retirements and people leaving for other jobs.

"There was a much stronger decrease in purchasing activity, as companies looked to reduce their spending in the face of steep inflationary pressures. With purchasing down, and delivery times continuing to lengthen sharply owing to shipping delays and disruption at ports, input inventories contracted for the sixth month running," the company highlighted.

Prices for a number of inputs continued to rise, including steel, aluminium, fuel and transport, which led to another marked increase in overall costs. Notably, the pace of inflation softened from November's recent peak in part owing to a weaker rise in workers' salaries.

"Higher purchasing costs were largely passed through to customers as latest data signalled a sharp uptick in selling charges. The rate of inflation also slowed from the previous month, but was still quicker than the 2021 average," IHS Markit said.

"In comparison to previous waves in South Africa, the latest downturn in activity was relatively subdued, showing that looser measures had helped the economy to grow more resilient to the pandemic. Further, confidence regarding future output remained strong and above the series trend, as firms stated that they expect activity to recover quickly as case numbers decrease and vaccine uptake rises," said Owen.

"That said, high inflationary pressures will continue to impact businesses at the start of 2022. Supply disruptions also remain, including at local ports and on shipping routes, which is stopping some firms from restocking their inventories," he said.

The headline South Africa PMI is a composite single-figure indicator of private sector business performance. It is derived from indicators for new orders, output, employment, suppliers’ delivery times and stocks of purchases.