- In July, South Africa’s private sector posted the quickest fall in output and new orders since March
- Official statistics show that the country’s inflation was at a near four-year low.
- Business confidence was however at the highest levels since February 2022.
As South Africa stepped into the second half of 2024, the country’s economy continued to face challenges, with the private sector contracting for the second month in a row.
The latest Purchasing Managers’ Index (PMI) report from S&P Global paints a complex picture—while the contraction deepened in July, there are also signs of optimism that could signal a brighter future.
A deepening contraction in South Africa’s private sector
The S&P Global South Africa PMI for July registered at 49.3, a slight decline from June’s 49.2. While the change may seem minor, it is significant as it marks the second month in a row that the PMI has remained below the neutral 50.0 threshold, indicating a continued contraction in the private sector.
The July reading also represents the sharpest drop in output and new business in four months, suggesting that South Africa’s private sector is still grappling with a challenging economic environment.
This contraction was spread across all sectors covered by the survey, with companies reporting a noticeable decline in output. The downturn in output was largely attributed to a drop in new business, as clients restricted spending in response to subdued economic conditions.
The sharp decline in both activity and demand underscores the fragility of South Africa’s private sector, which remains vulnerable to both domestic and global economic pressures.
David Owen, Senior Economist at S&P Global Market Intelligence, highlighted the ongoing challenges: “Demand and supply challenges remained present in the South African private sector as we began the second half of 2024, with new orders continuing to decline and supplier performance worsening as global transport issues and domestic port congestion hindered vendors.”
Supply chain struggles: Port congestion and delivery delays
One of the most significant factors contributing to the contraction in South Africa’s private sector is the ongoing struggle with supply chain disruptions.
The PMI report pointed to a faster deterioration in vendor performance in July, with lead times worsening to the greatest extent since February 2024. This deterioration was largely driven by port congestion, both domestically and abroad, which has hampered the ability of suppliers to deliver goods on time.
These supply chain challenges have had a ripple effect on the broader economy. Many firms reported that slower deliveries had curtailed their activity, forcing them to run down inventories to finalize existing contracts.
This depletion of input stocks, combined with reduced purchases and a back-to-back decrease in employment, highlights the difficult choices that businesses are being forced to make as they navigate an increasingly challenging environment.
The impact of these supply chain disruptions is evident in the PMI data, with backlogs of work decreasing at the fastest rate since November 2023. The modest fall in total input stocks, the fastest observed so far in 2024, underscores the strain that South African businesses are under as they attempt to maintain operations in the face of persistent logistical challenges.
Easing inflationary pressures: A silver lining?
Despite the bleak outlook presented by the PMI report, some silver linings offer hope for South Africa’s private sector. One of the most encouraging findings is the continued easing of inflationary pressures.
Although input costs rose at a quicker pace than in June, the overall rate of input cost inflation remained one of the weakest recorded since late 2020.
This easing of inflationary pressures is particularly important given the context of South Africa’s recent economic history, where businesses have struggled with rising costs for materials, electricity, and wages.
In July, the PMI data indicated that while some firms did face higher costs, these increases were relatively mild compared to the significant price hikes seen in previous years.
David Owen noted the importance of these trends: “The PMI survey data continued to back up the latter, with input price inflation still at a much cooler pace compared to recent trends and output charges rising at the slowest rate in nearly four years. This should be encouraging for the Reserve Bank who will be looking for signs as to when monetary policy can be eased.”
The slower rise in output prices, observed in July, suggests that businesses are finding ways to absorb some of these costs rather than passing them on to consumers. While this may put pressure on profit margins, it also helps to support demand by keeping prices more affordable for customers.
In an environment where demand conditions remain fragile, this balancing act between cost management and pricing strategy is crucial for sustaining business activity.
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A glimmer of optimism: Political stability and business confidence
Amidst the challenges facing South Africa’s private sector, there is a notable increase in business confidence that could signal a turning point for the economy.
The PMI report revealed that business confidence improved in July, rising to its highest level in nearly two-and-a-half years. This surge in optimism is largely attributed to expectations of greater political stability following the general election, which many firms believe will support improvements in demand and activity.
The anticipation of a more stable political environment is a critical factor in bolstering business confidence. In recent years, political uncertainty has been a significant drag on South Africa’s economy, with businesses reluctant to invest or expand in the face of potential policy shifts.
The prospect of a more predictable and stable political landscape is therefore a welcome development for the private sector, offering hope that the worst of the contraction may soon be behind us.
Additionally, the PMI report highlighted the positive impact of reduced load shedding and softer price pressures, which are expected to support growth in the coming months. Load shedding, or rolling blackouts, has been a major challenge for South African businesses, disrupting operations and increasing costs.
The easing of this burden, combined with the softer rise in prices, provides a more favorable operating environment that could help to reverse the current downturn.
Navigating a challenging economy
The July PMI report for South Africa underscores the complexity of the challenges facing the private sector as it navigates a difficult economic landscape.
The deepening contraction in output and new business, driven by supply chain disruptions and subdued demand, highlights the vulnerability of South Africa’s economy to both domestic and global pressures.
However, amidst these challenges, there are signs of hope. The easing of inflationary pressures, the prospect of greater political stability, and the increase in business confidence all point to the potential for a turnaround in the coming months.
While the road ahead remains uncertain, these bright spots offer a glimmer of optimism that South Africa’s private sector may yet find its footing and emerge stronger from the current downturn.
As businesses look to the future, the key will be to build on these positive developments, leveraging the opportunities presented by a more stable political environment and a less inflationary backdrop.
By doing so, South Africa’s private sector can begin to recover from the recent contraction and lay the foundation for sustained growth in the years to come.
