Business Confidence Bleak in South Africa as the PMI Contracts

Talking Points:

• SACCI Business Confidence increases in January but remains below last year’s average
• Manufacturing contracts with a PMI reading of 49.8; electricity production falls 1.2% (y/y)
• USDZAR moves to support in a flag pattern despite weakened business confidence

With its slowest start in 18 years, South Africa’s SACCI Business Confidence remains below last year’s average as the country’s manufacturing sector contracts and electricity production drops. In facing both internal and external challenges, the Chamber of Commerce and Industry expects further declines in business and investor confidence moving forward.

Despite increasing to 89.3, the index in January of 2015 remains 1.2 points lower than the level recorded in January of 2014. Two indicators, exports and precious metals, consecutively increased month- over-month while the remaining sub-indices did not exhibit any distinguishable trends. Year-over-year sectors within the manufacturing, retail trade, and mining industries suffered declines in productivity. Manufacturing activity fell by 1.3%, retail trade (excluding food) fell by 3.4% and mining of PGM fell by 14.3%. Activity growth remains at risk given the following factors: low international crude prices, slower economic growth among BRICS partners, and lingering domestic power outages.

A mismatch between electricity production and demand has arisen in South Africa, inhibiting the nation from reaching its full economic capacity. When compared to 2013, electricity production in 2014 was down 1.4 percent or 3,495 KWh. Partially offsetting this decrease, electricity imports increased by 18.6%, leaving total consumption down only 0.7%. Without enough electricity supply to meet demand, industrial growth remains at risk.

With the first negative reading in six months, HSBC’s South Africa manufacturing PMI fell to 49.8 signaling deterioration in operating conditions. Output and new export orders indices fell below 50, leaving the employment component stagnant. Taking note of this shift, the IMF has lowered South Africa’s growth outlook for 2015 by 0.2 percentage points to 2.1%.

USDZAR Daily Chart

Chart Created by Walker England Using MarketSope2.0