Operating conditions at South African private sector businesses improved for the first time in a year during May, mainly driven by a return to new order growth and renewed job creation.

However, output continued to decline and companies remained cautious about their stock policies, the latest Standard Bank South Africa Purchasing Managers' Index (PMI)  showed on Friday.

Inflationary pressures accelerated, with both input and output prices rising at stronger rates. The seasonally adjusted Standard Bank South Africa PMI rose from April’s 47.9 to 50.2 in May.

Although signalling overall growth in the sector, the underlying pace of expansion was only fractional.

On the price front, input costs rose at the strongest rate in over two years. Panellists commented on higher fuel prices, rising staff costs and exchange rate factors. Some firms passed higher input costs on to their clients, resulting in a further increase in average selling prices.

However, with a renewed increase in new work, companies were encouraged to add to their payrolls during May. Employment rose for the first time in three months, albeit marginally.

Despite the slight rise in new work, companies lowered their buying activity further during the month, which some panel members attributed to rising input costs. Consequently, pre-production inventories fell, as economic conditions remained challenging.

“The rise in the PMI was driven by new orders on the back of rising external demand as well as new clients and investments, which also had a positive impact on employment during the month.

"However, challenging economic conditions resulted in actual output remaining in contraction. Output was also negatively impacted by rising input costs despite expanding new orders. Both input and output costs rose during the month," said Standard Bank economist Kuvasha Naidoo.

He said the improvement in May’s PMI to above 50 points for the first time in 12 months is a welcome turning point in the data, but more above-50 point prints will be necessary to make a trend that instills investment confidence.

“Interestingly, the three-month moving average of the leading PMI indicator is above 1.0, which implies that new orders are exceeding stocks of purchases. We would have to see a corresponding rise in inventories to above 50 for the ratio to meaningfully signal future expansion in the private sector.”