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Business confidence hits three-month high

Business conditions have now strengthened for seven consecutive months, ignoring the downturn caused by ongoing geopolitical tensions.

Business conditions have now strengthened for seven consecutive months, ignoring the downturn caused by ongoing geopolitical tensions.

Published Aug 4, 2022

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Business confidence in South Africa ticked up to a three-month high in July, in spite of constrained capacity due to crippling power cuts and considerable pressure from cost rises.

S&P Global Ratings said yesterday that around 38 percent of firms expressed a positive outlook for the next 12 months on hopes of improving demand and a moderation of price pressures.

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However, expectations remained lower than those seen at the beginning of the year.

This comes as the S&P Global Purchasing Managers Index (PMI) picked up for a third successive month in July, helped by improving new orders, output and employment numbers.

The PMI rose to a 14-month high of 52.7 points in July, up slightly from 52.5 points in June, to signal a solid improvement in the health of the private sector economy.

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Business conditions have now strengthened for seven consecutive months, ignoring the downturn caused by ongoing geopolitical tensions.

S&P said all three metrics signalled the quickest rates of growth since mid-2021, amid reports of improving market demand despite rapid inflationary pressures.

However, rising costs for fuel, utilities and labour led to a further sharp increase in business expenses, putting further pressure on companies to raise their selling charges.

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S&P Global Market Intelligence economist David Owen said the South African economy remained firmly on the upside in July as businesses saw client demand improve, despite reports of price pressures acting to dampen spending in some cases.

Owen said new business growth quickened to the fastest rate since May 2021, leading to accelerations in both output and employment growth.

“However, firms were still under considerable pressure from rising fuel and electricity prices in July, as well as further reports of heightened shipping prices and material shortages due to the pandemic and the Russia-Ukraine war,” Owen said.

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“Strength in the US dollar added to purchasing costs, while some firms were forced to increase staff wages to compensate for higher living costs.”

The gap between output and new order growth was partly due to reports of load shedding over the month, which acted to constrain business capacity and led to a renewed rise in backlogs of work.

Crippling power cuts also left the manufacturing sector subdued in July, with the Absa PMI released earlier this week experiencing a tough start to the third quarter as it fell into contractionary territory for the first time in 12 months.

At the same time, South African businesses faced considerable pressure from cost rises during July.

S&P Global said the rate of input price inflation was broadly unchanged from June's 99-month peak, as firms reported further rises in fuel, electricity and shipping prices.

Average prices charged by private sector firms also rose at a marked pace in July as companies looked to protect their earnings.

Owen said this would have a negative impact on the economy as household spending was likely to slow down.

“With output charges again up rapidly as a result, it appears likely that the current growth spurt in the economy may be short-lived, as businesses and households start to rein in spending to cope with inflation,” Owen said.

“Despite this, firms remained broadly confident that activity would grow over the next 12 months with optimism still above the survey trend, though this was partly contingent on inflationary pressures moderating.”

BUSINESS REPORT

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