Sentiment in South Africa’s manufacturing industry over business conditions in the next six months has plunged to depressed levels last seen three years ago at the height of Covid-19 restrictions due to fears of unprecedented levels of power cuts this winter.
The seasonally adjusted Absa Purchasing Managers’ Index (PMI), released yesterday, remained firmly in the contractionary territory as it fell to 49.2 index points in May, from 49.8 points in April.
The latest reading pointed to the fourth consecutive month of contraction in manufacturing activity during a sharp deterioration in the business outlook to its weakest since early 2020, amid the ongoing power crisis in South Africa.
Absa’s senior economist, Miyelani Maluleke, said, “This is the most pessimistic respondents have been about the near-term outlook since the strictest phase of South Africa's Covid lockdown three years ago.
“Eskom confirming earlier concerns about the possibility of higher stages of load shedding during winter likely contributed to the souring in sentiment.”
Eskom has warned that it could ramp up its rotational power cuts to an unprecedented Stage 8 load shedding if it fails to manage rising demand amidst deteriorating electricity generation capacity.
Stage 8 load shedding means up to 16 hours of power cuts in a 32-hour cycle, which would severely impact the energy-intensive manufacturing industry even further.
The power utility has already implemented more hours of power cuts in the year to date than it did during the whole of 2022, and more strife is expected for businesses as the crisis is only forecast to ease mid-2024.
The ongoing power crisis has seen ratings agency S&P slashing South Africa’s growth forecast for 2023 from 1.6% a year ago to 0.2% as the intensifying crisis will cripple economic activity.
The employment index remained mostly unchanged for the third month at a subdued 45.6 points in May; this is not unexpected given the little movement in the demand and activity indicator.
Investec economist Lara Hodes said South Africa’s dire short-term growth outlook was not conducive to a sustainable lift in employment.
Investec is expecting economic growth of just 0.2% this year, in line with a slightly higher forecast of 0.3% by the SA Reserve Bank (SARB).
Last week, the SARB said energy and logistical constraints remained binding on South Africa’s growth outlook; load shedding alone was estimated to deduct 2 percentage points from growth this year.
“Indeed, business activity continues to be hampered by the country’s critical electricity supply situation,” Hodes said.
“Electricity generation is down 7.9% year-on-year in the year to date, according to the latest statistics released by Stats SA.”
Meanwhile, Absa said the business activity index was virtually unchanged at a lacklustre 47.7 points from a subdued 47.6 points in April.
It said cumulative load shedding was roughly similar in April and May and likely did not weigh more/less on activity in May than the previous month.
“The average index level of business activity in the first two months of the second quarter is below the first-quarter average,” it said.
“This suggests that the sector may once again detract from quarterly GDP growth after an expected expansion in the first quarter.”
Old Mutual Investment Group portfolio manager Jason Swartz said the business cycle was currently experiencing a contraction, which typically yields poor returns as pricing power weakens and earnings begin to collapse.
Swartz said there was a litany of challenges facing the local economy, as seen through the higher sovereign risk premium demanded by investors, particularly when compared to other emerging markets.
“We know that load shedding is a key contributor here, continuing to concern investors as it erodes growth,” Swartz said.
“But while we certainly aren’t out of the woods yet, the trough is in sight as more capacity comes back onto the grid in 2024, alleviating some of the persistent challenges at Eskom. That said, caution remains necessary.”
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