Cautious optimism for businesses in South Africa heading into 2023

The seasonally adjusted Absa Purchasing Managers’ Index (PMI) rose for a third month to reach 53.1 index points in December 2022, slightly up from 52.6 in November.

According to economists from the Bureau for Economic Research (BER), while the headline number is positive, the underlying picture is more mixed.

“Most concerning was the business activity index which deteriorated further in December,” the BER said. “This is indicative of weak underlying momentum in the sector.”

Sustained and intense load shedding during the last month of 2022 was likely a key drag on the sector.

More encouraging was the sustained demand growth signalled by the new sales orders index. The index ticked down slightly from November but remained firmly above the 50-point mark for a second month.

A further positive development was a rise in the expected business conditions index. Purchasing managers turned optimistic about business conditions in six months, with the index rising to 54.9 in December from 51.7 in November.

“The expectation that the peak in cost pressure is, for now, behind manufacturers may have underpinned the more optimistic outlook. Indeed, the purchasing price index declined to its lowest level since late 2019 and is now even well below its long-term average reading,” the BER said.

The significantly lower Brent oil price and slightly stronger rand exchange rate relative to November likely drove the alleviation of cost pressure.

“The steep downturn in the PMI price index at the end of the year bodes well for a further moderation in actual producer price inflation in the first months of 2023,” the economists noted.

However, there are some red flags present in the data. Somewhat worrying was the renewed uptick in the supplier deliveries index, the BER noted, with new sales orders dipping somewhat – although remaining in positive terrain.

“This could point to renewed friction in supply chains rather than strong demand causing a lengthening in delivery times,” the group said.

“This is because the index is inverted, so slower deliveries – often caused by higher demand for goods – cause the index to increase. There is a likelihood of further near-term global supply chain disruptions stemming from the rapid reopening of the Chinese economy that has resulted in surging Covid-19 infections.”

And as load shedding wreaked havoc on the indices for December, power troubles lie ahead for the rest of 2023.

Eskom on Thursday said that it has been forced to return to stage 4 load shedding for the rest of the week and into the weekend, with no indication for when the country will move to lower stages or have load shedding suspended.

2022 marked the worst year for load shedding on record, with analysts predicting worse to come for 2023.

As the power utility struggles to keep its ageing fleet online amid frequent breakdowns, it has also taken one unit of its most reliable station – the Koeberg Nuclear Power Plant – offline for a life extension project. This has removed 1,000MW from the grid until the middle of the year at least, whereafter the second unit will be taken offline for the same purpose.

While this is happening, 3,000MW of energy is offline from critical breakdowns and faults at the ‘newer’ Medupi and Kusile Power Stations.

Based on its own outlook, Eskom needs to keep outages below 13,000MW to stave off the worst of load shedding, but it is barely able to keep breakdowns below 16,000MW – its worst planned-for scenario.

Persistent load shedding has a significant drag effect on almost every sector of South Africa’s economy and GDP as a whole – putting limits on any overt optimism from industry and businesses.

Read: Rand takes a knock as economists raise red flags over South Africa’s economy