Private sector health deteriorates in May

The improvement in business activity reported in April was short-lived, as the private sector contracted in May.

The IHS Markit Purchasing Managers Index (PMI) released on Wednesday was down to 49.3 in May, compared to the 50.3 reported in April. The PMI is a single figure which measures private sector business performance by taking into account indicators such as new orders, output, employment, suppliers’ delivery times and stocks of purchases. A figure greater than 50 indicates an improvement in the sector.

May’s PMI shows that there has been a slight deterioration in the health of the private sector. “The sector has now failed to post consecutive monthly improvements in operating conditions for over a year,” the report read.

According to the report, business activity was affected by the quickest drop in new orders since November 2018. “Demand was partly affected by the election, although panel members also reported difficult economic conditions across the private sector,” IHS Markit economist David Owen commented.

Other contributors were the fall in export sales. SA businesses then responded by cutting output in May.  Rising input prices also forced firms to increase selling prices for the first time in three months. Some businesses implemented lower prices to attract new customers. But other firms elected to increase prices to avoid a “weaker” balance sheet, the report read.

Future sentiment improves

“Despite falling output, few firms cut workforce numbers, partly because of growing sentiment that sales will rebound,” the report read. Firms also expect new contracts and orders from new clients to boost activity in the coming year.

“Future sentiment rose to the highest for 13 months, showing that there is still confidence in the South African economy,” Owen said.

Several businesses participating in the index attributed the positive outlook on the hopes that the new government will bring greater stability to markets, Owen said. But the latest PMI figures show that government will face a “difficult struggle” to reignite growth, he added.