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Business conditions worsen at sharpest pace since October
2018
Power cuts hit output and demand
Firms wary of economic challenges in 2020
South Africa's private sector stumbled at the close of 2019,
with output contracting amid a heightened round of "load shedding"
that caused significant power cuts at businesses. Amid numerous
setbacks during the year, the country is expected to record weak
annual GDP growth of just 0.2%. Challenges also remain for 2020,
including Eskom restructuring, drought, strikes and property law
changes, signalling that the ruling ANC party has a fraught period
ahead to balance long-term policy decisions with efforts to restore
economic performance.
Further load shedding adds to fragilities
The South Africa PMI, compiled by IHS Markit, ended 2019 on a
sour note, posting 47.6 in December to indicate a marked
deterioration in private sector business conditions. The reading
was the lowest for 14 months and among the weakest seen for over
five years. The poor end to the year represents a worsening of the
trend of decline that has been observed for most of the period
since the middle of 2018.
In the latest survey, struggling firms drew attention to
widespread power cuts, as the country's electricity supplier,
Eskom, engaged in a further round of "load shedding". This removed
as much as 6,000 megawatts from the grid on 9th December, the
largest cut seen throughout the past year, which impacted
production at several surveyed businesses including mining and
manufacturing firms. Power disruption was also reported to have hit
demand, with new orders falling at the fastest pace in 14
months.
While the latest setback for the South African economy was the
sharpest seen in 2019, according to PMI data, it was illustrative
of a year fraught with economic and social fragilities that
undermined business activity. Power cuts, drought, civil unrest and
a weakening trade climate have all limited the economy. This is
apparent in the PMI which displayed its worst annual performance
(49.2) so far in 2019 (the series began in 2011). As such, fourth
quarter GDP results are expected to show subdued growth overall for
the year. Based on historical relationships, the PMI on its own
suggests that 2019 annual economic growth will be around 0.7%. IHS
Markit's current prediction is for an increase in GDP of 0.2%,
which would be the weakest since the financial crisis.
Business confidence weak for 2020
Amid slow economic performance, businesses are unsurprisingly
lacking in confidence about the prospects for 2020. The PMI Future
Output Index - which measures the business outlook for activity in
the coming 12 months - continued to run at a relatively weak level
by historical standards in December, although was the strongest
seen in the second half of the year.
Infrastructure problems are a key feature of comments from
surveyed businesses, with water and electricity the notable areas
of concern. Drought conditions have debilitated agriculture and
business in parts of the country. Firms are also generally
expectant of further power cuts this year as Eskom undergoes a
restructuring process. Indeed, the country has already suffered
some load shedding in January. Plans are underway to unbundle the
utility into three divisions that will oversee generation,
transmission and distribution separately, with transmission to be
completed by March. While this process occurs, there is the risk of
further disruption to economic activity.
Another notable concern among investors is uncertainty over
future property rights. The ruling ANC party are looking to rework
property law to allow land expropriation without compensation.
While the short-term risk to business is low, hesitation around the
final agreed policy is appearing to stall spending decisions and
fixed investment from overseas.
With that said, the outlook is not all negative. Exports have
weakened since the start of the US/China trade war, so news of a
"phase one" deal will be welcomed by South African businesses as a
potential driver of global trade growth in 2020. The deal only
pulls back on some tariffs but could lead to further climb-downs
that re-stimulate the export economy, with mining and manufacturing
sectors standing to benefit the most. Local issues could
nevertheless still limit firms' competitiveness in the global
market.
Assuming no major disruptions, IHS Markit expects GDP growth to
rebound to 1% in 2020, but the prospects of South African
businesses this year depend on a number of factors, not least of
all how the government responds to ongoing structural deficits and
social issues. As such, it could be another turbulent year for the
country. January PMI will be released on February 5th and give the
first indication as to how the economy is faring in the new
year.
Purchasing Managers' Index™ (PMI™) data are compiled by IHS Markit for more than 40 economies worldwide. The monthly data are derived from surveys of senior executives at private sector companies, and are available only via subscription. The PMI dataset features a headline number, which indicates the overall health of an economy, and sub-indices, which provide insights into other key economic drivers such as GDP, inflation, exports, capacity utilization, employment and inventories. The PMI data are used by financial and corporate professionals to better understand where economies and markets are headed, and to uncover opportunities.
