South Africa's private sector returned to growth in June as easing inflation pressures and flexible hiring improved business conditions, although weak demand continued to weigh on output and new orders.
The S&P Global South Africa Purchasing Managers' Index rose to 50.5 in June from 49.6 in May, its highest reading in two months and above the 50-point threshold separating expansion from contraction.
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The readings indicated an improvement in private sector conditions for the third time in four months. However, the expansion was modest, as production and new orders continued to decline for the second consecutive month, albeit at a slower pace than in May.
“The PMI recovery in June was mainly helped by resilient hiring at South African companies, although output and order books fell at a slower pace than in May,” said David Owen, chief economist at S&P Global Market Intelligence.
“The outlook among private sector businesses suggests economic challenges are expected to persist, with optimism at its weakest level in almost five years.”
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Businesses attributed the weak sales to limited consumer spending, higher prices and persistent economic uncertainty, which limited customer demand. Production fell for the second consecutive month, while total new orders also remained in contraction territory.
External demand provided some support. Growth in new export orders returned after a decline in May, while the services sector was the only category to record growth in new business.
Employment remained relatively resilient, with companies continuing to hire permanent and temporary workers to expand operating capacity. Although the pace of job creation slowed slightly from May, the data showed that businesses were still adding workers despite low demand conditions.
Work backlogs remained broadly unchanged, but remained below the neutral 50-point mark for the ninth consecutive month, suggesting companies continued to operate with excess capacity.
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The most encouraging development in last month's survey was the sharp easing of cost pressures. Input price inflation slowed significantly after reaching a 46-month high in May, with the input price index falling by nearly seven points during the month.
Output price inflation also declined from its highest level in nearly four years, although many companies said they were still passing on higher fuel costs to customers.
“The silver lining from the June data is a significant reduction in inflation pressures,” Owen said. “While survey observations indicate that recent cost increases have been largely dependent on oil markets, the significant decline in global oil prices during June provides some confidence that inflation will moderate further.”
South Africa's annual inflation rate rose to 4.5 percent in May from 4.0 percent in April, mainly due to higher fuel prices. However, food and non-alcohol beverages inflation continued to decline and fell to 1.9 per cent.
June PMIs show the private sector is gaining some momentum in Africa's largest economy, but the recovery remains fragile. A softening of inflation may provide relief to businesses and consumers in the coming months, although weak domestic demand and declining business confidence are likely to hamper a strong expansion.
