Bad turn for business in South Africa as consumers take a beating

 ·3 Jun 2024

The seasonally adjusted Absa Purchasing Managers’ Index (PMI) has dropped below 50 points in May 2024, as businesses report trouble with household consumption and a hold on activity around the national elections.

According to the Bureau for Economic Research (BER), the headline PMI sank to 43.8 points from 54 points in April.

This drop came despite another month of no load shedding. While local power outages remain frequent, the deterioration of business conditions appears to be driven by a significant drop in demand and uncertainty around the elections, the BER said.

“Numerous respondents said that orders were put on hold as clients waited for the election results. The PMI has been in contractionary territory for three out of five months this year, as the manufacturing sector seems volatile in an election year,” it said.

The business activity index saw a massive decline to 38.1 points in May from 57.2 points in April, and new sales orders declined to 37.8 points in May from 55.6 points in April.

“Amid sustained high interest rates and low credit extension, domestic demand remains sluggish. Respondents state that orders are drying up as consumers seem to be focusing on necessities,” the BER said.

Export sales also fell back in May, putting further pressure on demand. Supplier problems in Europe affected some of the local manufacturers in the transport sector, as there were delays in the deliveries of the necessary parts used as input in the local market.

“Port issues remain a concern for most local manufacturers, although there was an improvement in supplier deliveries, suggesting that the situation is improving. The supplier deliveries index declined from 57.4 in April to 55.4 in May, indicating shorter delivery times.”

Negatively, a decline in orders across the sector may have also supported this improvement, the BER noted.

While things were bleak for businesses in May, the BER noted that the results did contain some good news, as the index for expected business conditions in six months’ time increased to 57.6 in May from 55.7 in April.

“Respondents likely hope for a favourable election outcome and a return of ‘put-on-hold’ orders. Manufacturers could also be more upbeat about the global economic recovery, particularly in Europe.

The hope for a favourable election outcome may prove to be just that, however, with the national election results not giving any party a majority mandate, leaving the ANC government in a much weaker position and needing to form coalitions to remain in the driving seat.

The party has the option of entering coalitions with the DA and other “business-friendly” parties, which would boost the economy, investment and business operations. However, the party could also team up with anti-business radicals in the EFF and MK to form a government, in which case the opposite might become reality.

Other positive news in the PMI was that the purchasing price index declined to 66.9 in May from 72.4 points in April.

“This is the lowest reading in six months and a second consecutive month of decline in input prices, reflecting easing cost pressure.

“Oil prices have remained relatively low due to sluggish demand in the global markets, which supports the manufacturing industry. The stronger rand exchange rate through most of the month likely also contributed to softer cost increases.”

As with the forward-looking sentiment, the rand strength is also up in the air: with an ANC/DA coalition, markets are likely to respond positively and the local unit could strengthen further. However, with an ANC/EFF/MK coalition, the currency could crumble.

Read: Investors should be very worried about South Africa: risk expert

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