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Weak PMI readings point to problematic first half of 2019 for
private sector businesses
Tariff escalation risks hurting growth prospects
How does President Ramaphosa respond?
On the 8th May, South Africa elected the African National
Congress to a new term in office with the smallest majority of
votes seen during the party's reign. Reflective of declining
sentiment amid social and economic woes, President Cyril Ramaphosa
now has a hard task to bring the country out of its numerous
difficulties.
While the economy has emerged from a recession that mired
business sentiment last year, PMI surveys suggest that official
data will likely show only modest second quarter growth after only
a marginal first quarter expansion. Furthermore, an escalation of
US tariffs on Chinese exports may feed through into a decline in
South African exports.
PMI signals weak growth in Q1
The IHS Markit South Africa PMI® covers a
representative sample of 400 private sector companies operating in
South Africa. A reading above 50.0 signals growth in the private
sector, whereas a reading below 50.0 signals a deterioration.
Historically, a reading of 50.0 correlates with approximately 1.4%
annual GDP growth. The track record of the survey suggests that the
PMI needs to drop to 46.9 to signal a contraction of the economy on
an annual basis.
For eight out of the last ten months, the headline PMI has
registered below 50.0, albeit only signalling a contraction of the
economy for one month (October 2018). The latest survey data for
April registered only a slight improvement in business
conditions.
As such, growth in the first half of the year will likely be
modest at best. The PMI points to very weak annual growth in Q1,
with official figures not released until June. More encouragingly,
April data suggests that growth has picked up in the second
quarter, albeit remaining subdued.
The weakness of business activity earlier this year was driven
firstly by weak demand in light of a domestic recession and
increasingly sluggish global trade growth via US tariffs on Chinese
goods. This fed through into weak demand for South African metal
exports from Chinese customers.
Panellists also pointed to frequent power cuts towards the end
of the first quarter, restricting sales and output levels. The
nation's power supplier, Eskom, has implemented multiple rounds of
load shedding as it struggles with excess demand.
On the flip side, fears of a spike in price inflation have eased
in recent months. Due to a deteriorating rand value late last year,
a rise in the PMI's Input Prices sub-index suggested that inflation
may jump to around 6%. However, the rise in the seasonally adjusted
index was brief, and since then it has declined to the lowest in
the series history as firms cut back on input purchases. Thus,
inflation is likely to remain well within the government's target
of 3-6%.
Reignited trade war exposes export risk
On 5th May, President Trump announced increased tariffs on
Chinese imports. Raising fees from 10% to 25% on $200bn worth of
goods as from 10th May, the US president has looked to put pressure
on Chinese firms in what is already a difficult business
environment. Although fiscal stimulus may help support growth in
the domestic economy, manufacturing output may remain sluggish,
leading Chinese producers to decrease input spending.
Already, South Africa has been particularly exposed to the
impact of China's slowdown resulting from US tariffs. They are
South Africa's largest trading partner, accounting for 16% of the
country's total exports1. Moreover, mining and metal
goods represent a large proportion of these exports and demand
depends heavily on the rate of industrial production in China.
Tariff hikes are likely to pose further risks to trade for South
Africa. The level of GDP from mining was the lowest in two years in
the final quarter of 2018, and could weaken further. IHS Markit's
Global Link Model predicts a drop of 0.8% in mining growth as a
result of the trade war, alongside softer growth forecasts for a
number of other sectors.
Bleak outlook as ANC begins new term
Cyril Ramaphosa starts his first full term of government with a
lot to contend with. Poor short-term growth is fed by structural
rigidities that hinder the country from achieving long spells of
progress. Weak infrastructure, stalling business investment and
near-record levels of unemployment all dampen firms' outlook for
future activity.
Ramaphosa has multiple plans to tackle these problems. Firstly,
he aims to deal with the overwhelming supply issues on the
electricity network after building delays to two new power
stations. A likely outcome is that Eskom is split up into three
entities responsible for generation, transmission and distribution
of energy. While unlikely to stop further short-term disruption,
this could help build an improved long-term structure for the
energy industry and boost business confidence.
More controversial are his substantive land reforms that aim to
redistribute land more equitably among South Africa's racial
classes. Soaring unemployment and poverty levels are key issues
restricting growth, and Ramaphosa hopes such reforms will address
these. However, the plan has already received notable push-back
from local and foreign investors.
The President will also look to maximise the opportunity of an
African free trade area, especially as larger trade partners
provide increasing uncertainty over exports. South Africa is in a
prime position to establish itself as a manufacturing hub for the
continent, so the removal of barriers with its neighbours could
provide a material boost to output and employment.
Establishing long-term plans may restore some hope among the
public, but they do not detract from the fact that businesses are
stumbling at the start of 2019. IHS Markit forecasts only 1.2% GDP
growth in 2019, a low figure for the country's post-apartheid era.
While this is partly due to weak international trade, it is also
affected by structural issues that the government desperately needs
to address. President Ramaphosa now has some time to do this, but
not forever, as the electorate's patience is starting to ebb
away.
The next South Africa PMI is released on Wednesday 5th June.
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.
