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CAPE TOWN - Reduced business activity in South Africa was the main influence over the decline in business conditions, as output last month fell at the fastest pace seen since April 2016.

This was according to the December purchasing managers’ index (PMI) survey data from Standard Bank and IHS Markit released yesterday, which showed a drop to 48.4 from 48.8 in November.

Standard Bank economist Thanda Sithole said, “The decline in the PMI is likely to persist in the near-term amid deteriorating fiscal outlook and elevated risk of further sovereign ratings downgrades. However, further declines in the private sector PMI could potentially be averted should the governing party work tirelessly to restore lost business confidence.”

Fall in activity

The headline Standard Bank PMI - which signalled a decline in the health of the country’s private sector for the fifth consecutive month - is a composite single-figure indicator of changes in private sector business conditions.

It is derived from indicators for new orders, output, employment, suppliers’ delivery times and stocks of purchases.

Any figure greater than 50 indicates overall improvement in conditions.

“In 2017, the economy-wide PMI averaged 49.8, slightly higher than the 49.7 average for 2016 but lower than the 50.6 historical average. This reflects continued lack of economic optimism and generally weak domestic economic activity.

“The decline in the private sector PMI in December was broad-based and was largely driven by continued declines in output (supply) which registered the fastest pace of decline observed in 21 months.

“This was followed by a further decline in new orders (demand), stocks of purchases (inventories) and employment,” said Sithole.

However, the country’s composite PMI is expected to be 49.71 by the end of this quarter, according to Trading Economics global macro models and analysts expectations.

Employment hit

“Looking forward, we estimate composite PMI in South Africa to stand at 49.84 in 12 months time. “In the long-term, the South Africa Standard Bank PMI is projected to trend around 49.84 in 2020, according to our econometric models,” they said on their website.

The survey found that private sector businesses reacted to falling workloads by contracting their capacity further. Employment decreased at a solid rate while purchasing activity was reduced at the quickest pace observed in more than three years.

Consequently, inventories continued to deplete.

It said despite a contraction in capacity, companies were still able to work through their outstanding business as backlogs continued to decline.

However, suppliers’ delivery times lengthened further due to delays at certain ports and product shortages. Meanwhile, higher purchase costs led to an uptick in cost inflationary pressures. Panel members largely attributed the increase to higher raw materials costs and unfavourable exchange rates.

- BUSINESS REPORT