South African economic turnaround on the cards

South Africa’s economy came under increasing pressure in August, with Absa’s Purchasing Managers’ Index (PMI) declining back into negative territory. 

The index decreased by 8.8 points to 43.6 points in August, down from 52.4 points in July. A reading below 50 indicates a contraction in economic activity. 

However, the index tracking expected business conditions in six months’ time remained at a high level above 60 points and signalled an improvement in the operating environment going forward. 

The Bureau of Economic Research (BER), which compiles the PMI with Absa, said the negative overall reading for August reflects high volatility due to political uncertainty, high inflation, elevated borrowing costs, and sluggish domestic demand. 

This is the fifth month out of eight months in 2024 where the reading has been in negative territory, indicating a severe economic slowdown as demand has not been enough to fuel increased production.

Absa’s PMI is made up of several underlying indices that track specific metrics that are then combined to form the broader index. 

These indices track metrics, including business activity, new sales orders, employment, inventories, supplier deliveries, and purchasing prices. 

The majority of these indices suffered declines in August, while some saw a positive uptick. 

The business activity index decreased by 11.9 points to 38.9 in August. In line, new sales orders plunged to 34.6 points. 

This follows a significant improvement in July when some sales orders that had been on hold due to political uncertainty started to come through. 

However, demand did not expand at the same pace in August. It is important to remember that the index measures month-on-month activity, so the downtick signals a decline relative to what seems to have been a strong July. 

Many respondents flagged significantly weaker sales and orders on the domestic front. Export sales contracted in August, possibly due to supply chain issues, weak activity in Europe, and slower-than-expected growth in China. 

The index measuring supplier performance decreased by 4.5 points, indicating an improvement (as this index is inversed). 

This could be because of a decrease in new orders, with suppliers under less pressure to meet demand.  

Worryingly, the employment index declined for a second consecutive month and has remained in contractionary terrain since March due to volatile activity in the sector.   

The purchasing price index did not change significantly, confirming market consensus and recent inflation data releases that inflation has peaked. 

The reading is the second lowest this year. Given stable oil prices and a relatively stronger currency, fuel prices decreased slightly at the beginning of August, with more significant cuts tipped for September.

The index tracking expected business conditions in six months’ time decreased to 61.3 points in August from 69.4 points in July. 

Despite the decline, it remains at a high level and signals an improvement in business conditions going forward.