Operating conditions in South Africa’s private sector economy deteriorated for the second straight month in August, as business activity and input purchasing decreased in line with an accelerated drop in new orders, says Standard Bank in its Purchasing Managers’ Index (PMI) for August.
Political as well as economic issues, affordability constraints, inflationary pressures and strikes were among the factors cited by respondents for the latest downturn.
The Standard Bank PMI is based on data compiled from monthly replies to questionnaires sent to purchasing executives in about 400 private sector companies, which have been carefully selected to accurately represent the true structure of the South African economy, including mining, manufacturing, services, construction and retail.
Overall input costs increased at the sharpest pace in over two years, largely owing to rand weakness, leading firms to raise their selling prices to the greatest extent since July 2016.
Falling from 49.3 in July to a 29-month low of 47.2 during August, the headline Standard Bank PMI pointed to a second consecutive deterioration in the health of the private sector.
The downturn reflected quicker declines in new business inflows, output and stocks of purchases.
Amid reports of political and economic crises, inflationary pressures and deteriorating consumer purchasing power, new work received by private sector firms declined at the second quickest rate in the survey history during August.
Contributing to the fall in total new work was another reduction in export sales, the eleventh in as many months.
Fading demand, coupled with nationwide protests, led to the steepest contraction in private sector activity since March 2016.
According to respondents, rand depreciation exerted mounting pressure on overall cost burdens in August. The rate of increase was sharp and hit a 25-month peak.
Further, purchase prices continued to rise at a much stronger pace than staff costs and, in both cases, rates of inflation accelerated from July.
Part of the additional cost burden was passed on to clients through upward adjustments to selling prices for goods and services.
The rate of charge inflation climbed to its highest mark since July 2016.
Anecdotal evidence indicated that strong cost inflationary pressures, high lending rates and destocking efforts encouraged firms to postpone purchases in August.
Meanwhile, input buying decreased at a moderate pace, but one that was the quickest in the year-to-date. In turn, this led to a faster reduction in overall stock levels.
August data pointed to back-to-back declines in private sector employment, with firms citing downsizing policies, financial difficulties and shortages of new work.
That said, the contraction in payroll numbers was mild and softened from July.
Moreover, suppliers’ delivery times lengthened midway through the third quarter on the back of disruptions caused by strikes and low stock levels at vendors.
Outstanding workloads were broadly unchanged from one month previously.
Standard Bank economist Thanda Sithole commented that even the bank’s below-consensus real gross domestic product (GDP) growth rate forecast of 1.2% for this year might now disappoint, but nevertheless, the South African Reserve Bank leading indicator rose in June, which is positive for medium-term growth prospects.
Standard Bank expects real GDP growth of 2% for 2019.