SA private sector contracts due to weaker rand, strikes - index

South Africa's private sector contracted during the last month, the latest Standard Bank Purchasing Managers' Index for July suggests. 

The PMI, released on Friday, is done in collaboration with IHS Markit. 

The headline PMI fell from 50.9 in June to 49.3 during July, signalling an overall decline in business conditions in the SA private sector. However, the extent to which the health of the sector deteriorated was only marginal, according to the index report.

Contributing to the overall decline were contractions in output and new orders. Firms surveyed often referred to weaker demand and widespread strikes. Furthermore, companies reduced their workforce numbers amid efforts to lower costs and bring staffing levels more in line with demand.

Purchasing activity also fell, which contributed to a reduction in stock levels.

Inflationary pressures

Companies also reported a decline in the volume of new orders from both domestic and foreign sources.

The index report states that inflationary pressures continued, although softening slightly since June. Survey evidence suggested that rising output prices were the result of higher cost burdens, with input price inflation remaining solid.

Firms indicated that they continued to pass on higher cost burdens, with output prices increasing from the previous month. However, in line with the trend in input costs, charges rose to a lesser extent than in June, according to the report.

Purchasing activity slipped into contraction territory at the start of the third quarter as new orders fell. As a result, stock levels declined, though to a lesser extent than in the previous month.

Thanda Sithole, economist at Standard Bank, commented that, after improving modestly over the past five months, domestic private sector business conditions deteriorated somewhat in July.

"Year-to-date, the PMI has averaged 50.3 points, above the 49.8 average in 2017. We therefore still see private sector business conditions improving this year," he said.

"Though somewhat cooler, consumer sentiment was still upbeat in the second quarter of 2018. Also, inflation is still benign, and interest rates will likely be steady and credit growth reasonable. This should support domestic demand and boost domestic output in the second half of 2018."

Standard Bank, therefore, expects gross domestic product (GDP) growth of 1.7% in 2018 - compared to 1.3% in 2017. However, it cautions that the downside risks remain high oil prices, an undervalued rand, the yet unresolved issue of land expropriation, as well as the global trade war.

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