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Cape Town – Ahead of South Africa’s possible downgrade to junk status on Friday, NKC African Economics explains what the country’s latest economic indicators really mean.
Purchasing Managers’ Index (PMI) rises
The seasonally adjusted Standard Bank South Africa PMI rose from April’s 47.9 to 50.2 in May, revealing that operating conditions at private sector businesses improved for the first time in a year during May. This was mainly driven by a return to new order growth and renewed job creation.
READ: PMI above crucial 50 mark for first time in a year
The Barclays PMI showed that the seasonally adjusted rates fell from 54.9 in April to 51.9 in May. Despite the decrease, this marks the third positive reading (above 50 points) since July 2015, while staying considerably above the six-year low of 43.3 recorded in November.
“Although … Barclays headline PMI reading fell by three points in May, it was the first three-month streak above the 50-point neutral mark since mid-2015, suggesting that the tide may finally be turning for local manufacturers,” explained NKC.
“However, two of the sub-indices returned to contractionary territory in May, and demand for local products remains lacklustre. As such, we expect a rebound in the manufacturing sector this year, but only marginally so.”
SA records trade surplus
South Africa’s cumulative trade deficit has declined 41.7% from R32.01bn in 2015 to R18.67bn in 2016. While exports dropped by R3bn and imports decreased by R1.42bn between March and April, the region still recorded a R430m trade surplus in April, compared to March’s surplus of R2.0bn.
READ: SA records R430m trade surplus for April
“Despite the second consecutive monthly surplus, South Africa’s cumulative merchandise trade balance during the first four months of 2016 still amounts to a deficit of R18.665bn,” NKC said.
“Furthermore, even though this deficit is markedly narrower than the R32.014bn recorded during the same period last year, the statistics are less impressive when considering the weak currency, which should theoretically serve as an incentive for exporters.
“Lacklustre external demand for South Africa’s export commodities continues to weigh on the country’s trade dynamics, with demand from China in particular expected to remain supressed for the foreseeable future.”
Money supply and credit data inches down
Private sector credit extension growth ticked down to 7.06% year-on-year (y/y) in April from a downward-revised 8.74% y/y in the previous month, compared to a consensus forecast of 8.9% y/y.
“PSCE (private sector credit extension) growth fell to its lowest rate since end-2013 in April, indicating that the combination of a tightened monetary policy stance by the SA Reserve Bank and South Africa’s lacklustre macroeconomic outlook is making its presence felt,” NKC explained.
“Expectations of further tightening by the central bank is set to see commercial banks rein back their lending to the private sector, which is already feeling the pressure from falling consumer demand in an environment of rising inflationary pressures and increasing interest rates.”
SA improves World Competitiveness ranking
South Africa improved its global ranking in terms of competitiveness from 53rd in 2015 to 52nd (out of 61 countries) in 2016.
“The slight improvement comes despite continued challenges being faced by the country, including droughts that threaten growth sustainability,” NKC said. “Additional concerns pertain to high unemployment, poor public service delivery, and perceived corruption.
“However, South Africa performed well on the international trade front, largely due to its export growth in a climate where other countries’ exports suffered from low oil prices.”
READ: SA in bottom 10 of World Competitiveness Rankings
Car sales in decline
Exports of locally made vehicles increased slightly in May on a y/y basis, while sales in the domestic new-vehicle market shrank by 10.3% y/y, continuing the downward trend for the South African domestic market.
The National Association of Automobile Manufacturers of SA noted that domestic sales are expected to remain under pressure as subdued economic growth, double-digit percentage increases in new vehicle prices, the possibility of further interest-rate hikes and ongoing challenges confront consumers and businesses, NKC explained.
