South African business conditions improve for fifth consecutive month in September, PMI shows

South Africa's private sector Purchasing Managers' Index (PMI) edged up to 50.2 in September, marking the fifth consecutive month of expansion, driven by increased output, new orders, and significantly easing cost pressures, which could further dampen CPI inflation. Despite improved export orders and supply chain conditions, business expectations for the year ahead fell to their lowest since July 2021 due to ongoing economic and political uncertainty, while employment levels continued to decline.

Analysis

South Africa's private sector demonstrated a fifth consecutive month of marginal improvement in September, with the S&P Global PMI rising to 50.2 from 50.1, driven by an uptick in output and new orders. A significant positive development is the sustained easing of cost pressures, with input prices increasing at the slowest rate in nearly a year, aided by a favorable exchange rate and lower headcounts. This disinflationary impulse supports the view that headline CPI, which recently fell to 3.3%, could decline further. However, this modest current activity is starkly contrasted by a deteriorating outlook; business expectations for the year ahead have collapsed to their lowest level since July 2021, citing economic and political uncertainty. The labor market remains a key weakness, with employment falling for a second month, though at a slower pace. On a positive note, supply chains continue to improve, with delivery times shortening for a record sixth straight month, and export orders saw their first rise since March, buoyed by demand from African markets which offset weakness from the U.S. and Europe.

Key Decisions for Investors

• Investors should view the current data with caution, weighing the disinflationary benefits and marginal activity growth against the significant drop in forward-looking business confidence, which signals potential future weakness.
• Monitor political and economic sentiment indicators closely, as the divergence between current activity and future expectations suggests that South Africa-exposed assets are highly sensitive to shifts in confidence.
• Consider sector-specific exposure, as companies with strong export links to other African markets may outperform domestically-focused firms that are more vulnerable to weak local sentiment and a soft labor market.