Businesses in South Africa have remained optimistic about the year-ahead outlook in spite of activity plunging deeper into contractionary territory for the third month in a row in May.
The S&P Global South Africa Purchasing Managers’ Index (PMI) released yesterday fell from 49.6 points in April to 47.9 points in May.
This PMI reading was the steepest decline in business activity since July 2021, pointing to the third consecutive month of contraction in the country’s private sector activity.
S&P said that underlying the downturn was a sharp and quicker contraction in business activity, which decreased to the greatest extent since July 2021.
The declines were seen in the industry, construction, wholesale and retail, and services sectors, with survey panellists saying the contraction in output was again mainly driven by sustained load shedding.
Eskom continued implementing intensified power cuts of up to Stage 6 load shedding in May, as its generation capacity deteriorated due to an increasing number of unplanned breakdowns.
Consequently, companies reduced their purchasing activity, resulting in a decrease in new order volumes after a fractional uplift was recorded in April.
S&P said firms noted that inflationary pressures and load shedding had continued to deter client spending, resulting in the quickest decline in sales since January.
Companies also suffered a decline in new export orders for the first time in four months amid reports that weaker client confidence and cost-cutting measures had hit demand.
S&P Global Market Intelligence senior economist David Owen said the PMI pointed to a challenging month for businesses across the country in May, as load shedding drove a further contraction in economic activity.
Owen said customer demand was back in negative territory after a promising uplift in new business during April, adding to a steep and accelerated drop in output.
“Moreover, firms continue to contend with severe inflation driven by weakness in the rand, high electricity costs and elevated wage pressures,” Owen said.
Recent data showed that annual consumer inflation slowed to 6.8% in April from 7.1% in March, the lowest reading since May 2022, with food inflation still at an elevated 13.9%.
The rate of input cost inflation ticked up from April, with over a quarter of respondents signalling an increase in their expenses.
As a result, companies registered another sharp rise in staff salaries to compensate workers facing higher living costs, leaving firms in wholesale and retail sectors forced to raise their selling charges rapidly during May.
On a positive note, Owen said supply chain problems were eroding quickly as global shipping delays dissipated and import goods sources came back online.
“Our survey data signalled that supplier delays were at their lowest since December 2019, which should at least help to soften price pressures arising from material and vendor costs,” he said.
“However, the bleak energy outlook over the winter suggests that more companies will look for alternative electricity sources, pushing costs and customer prices even higher. Weak demand trends are thus likely to continue, leading to additional falls in business activity.”
On the other hand, employment levels recovered modestly after a slight cut during April which, when combined with reduced new order intakes, meant that the drop in output had little impact on firms’ backlogs.
Also, supplier delays were at their lowest since December 2019.
Despite these challenges, South African businesses remained optimistic about the year-ahead outlook in May, with hopes often placed on expectations of improved demand and business expansion.
S&P said more than 44% of surveyed firms expected output to grow and positivity about the future aligned with a stabilising supply-side environment.
Several companies said a rapid improvement in goods supply from overseas had helped to boost efficiency at vendors, and allay some of the effects of load shedding.
BUSINESS REPORT