2021q4
Regional eXplorer (ReX) update – 4th quarter of 2021
IHS Markit is glad to announce the fourth quarter update for 2021 of Regional eXplorer (ReX) – the South African knowledge base of municipal level insight. Each quarter, data from a vast number of sources are incorporated into the ReX database to provide users with the most up-to-date statistics.
- IHS Markit South Africa PMI: Output slumps amid Omicron wave, but companies remain upbeat
- Near-term Economic Outlook
- Main data releases incorporated in this update
IHS Markit South Africa PMI: Output slumps amid Omicron wave, but companies remain upbeat
South African companies saw a renewed downturn in activity during December, latest PMI data showed, as concerns about the rapid increase in COVID-19 cases from the Omicron variant and tightened travel measures hit overall demand. Supply chains were also affected, while higher prices for a number of inputs continued to drive costs up sharply.
Nevertheless, firms were largely optimistic that the economy would recover from the latest wave, contributing to a strong 12-month outlook and fairly stable job numbers. The headline South Africa PMI® is a composite single-figure indicator of private sector business performance. It is derived from indicators for new orders, output, employment, suppliers’ delivery times and stocks of purchases. Any figure greater than 50.0 indicates an overall improvement in the sector.
The headline PMI returned to sub-50.0 territory in December, registering 48.4 from 51.7 in November. The index signalled a modest decline in business conditions that was broadly comparable with the strike-hit period in October. Activity levels fell at a sharp pace at the end of the year, which businesses largely attributed to a renewed decline in sales. In the wake of a sharp rise in COVID-19 cases linked to the Omicron variant, firms noted that clients were less willing to spend and that international travel restrictions had weakened tourism.
That said, whilst the overall fall in output was the fastest in five months, it was notably much softer than those recorded in July and the middle of 2020 when strict domestic COVID-19 measures were applied. Similarly, new orders fell sharply but at a slower rate than in those periods. Moreover, a number of panellists stated that they expect disruption from the Omicron wave to be short-lived. As a result, despite slipping to a four-month low, the outlook for future activity remained strong and above the series trend. Job numbers were also largely unaffected, with survey data signalling only a fractional drop in employment that was often linked to retirements and people leaving for other jobs. With staff numbers fairly stable, South African firms were able to lower their outstanding business in December. Backlogs fell for the first time in ten months and at the quickest rate since September 2020.
There was however a much stronger decrease in purchasing activity, as companies looked to reduce their spending in the face of steep inflationary pressures. With purchasing down, and delivery times continuing to lengthen sharply due to shipping delays and disruption at ports, input inventories contracted for the sixth month running. Prices for a number of inputs continued to rise, including steel, aluminium, fuel and transport, which led to another marked increase in overall costs. Notably though, the pace of inflation softened from November's recent peak in part due to a weaker rise in workers' salaries. Higher purchasing costs were largely passed through to customers as latest data signalled a sharp uptick in selling charges. The rate of inflation also slowed from the previous month, but was still quicker than the 2021 average.
Near-term Economic Outlook
GDP revisions for the first half of 2021, combined with sharp contraction in real GDP during the third
quarter, lowers the 2021 growth expectation to 4.7%.
- IHS Markit analysts have lowered South Africa’s real GDP growth expectation for 2021 to 4.7% from 5.0% previously. A downward revision in the official GDP numbers for the first half of 2021, combined with a sharper-than-expected contraction in real GDP during the third quarter, accounts for the revision.
- South Africa’s real GDP contracted by 1.5% quarter on quarter (q/q) during third quarter 2021, Statistics South Africa (StatsSA) reported. The slowdown was broad-based with a fall in in durable and nondurable consumer spending, leaving overall household spending down by 2.4% q/q. Total fixed investment spending was flat between the second and third quarters, while government consumption expenditure marginally increased by 0.1% q/q as compensation of employees accelerated. Net trade made a positive contribution to overall economic growth.
- IHS Markit analysts expect a bounceback in economic activity during fourth quarter 2021, although only at a moderate pace. A spike in COVID-19 cases driven by the Omicron variant during December combined with rising electricity disruptions, increasing and uncompetitive logistical costs, and industrial action and strikes in the steel industry over salary disputes, global supply chain disruptions and rising input costs, contributed to the dismal performance of the manufacturing sector during October. Real seasonally adjusted manufacturing production fell 5.9% month on month (m/m) during October, pulling the year-on-year (y/y) rate down to an 8.2% contraction.
- A sharp rebound in average monthly earnings (including bonuses and overtime payments) of employed workers to 9.7% y/y in second quarter 2021 from 3.2% y/y in the previous quarter allowed household spending to still make a significant contribution to the 1.2% q/q rise in headline GDP during the quarter. New job opportunities, however, remain insufficient to make up for the job losses incurred during 2020 and absorb new job entrants to the market. South Africa’s unemployment rate edged up to an all-time high 34.9% in third quarter 2021 as a result. In August 2021, the South African government extended the ZAR350/month (USD24/month) basic income grant (BIG) for the permanently unemployed to March 2022. The BIG is likely to partly balance the impact of the higher unemployment levels on overall household spending into first quarter 2022. Pent-up demand combined with low interest rates has furthermore provided support to durable spending during the first half of 2021, with pre-COVID-19 levels already exceeded by first quarter 2021.
- The rehabilitation of infrastructure damaged or destroyed during the social unrest will provide a short-tomedium term boost to fixed investment spending and retail stock replenishment. An upward shift in South Africa’s country risk rating, nonetheless, bodes negative for future investment costs and spending while pipeline investment programs could be delayed owing to ongoing security concerns. A landmark government announcement that lifts the licensing threshold for small-scale power-generation projects from 1 megawatt (MW) to 100MW should still unlock private investment in the renewable energy segment of the economy from 2022 onward and should attract investor interest from mines, motor vehicles assembly lines, and the health sector in particular. The public sector investment project pipeline is also building; however, project financing remains uncertain.
- South Africa’s net positive trade position has been a major contributor to overall GDP growth during the first half of 2021 and will likely continue to do so for the remainder of the year, albeit at a smaller magnitude. Resilient global commodity prices and stronger global trade are likely to maintain export earnings while the ongoing recovery in local demand combined with higher global oil prices will increase imports during 2021. Global supply-chain disruptions; rising container costs, which steepened during fourth quarter 2021; and operation disruptions at some of South Africa’s largest ports owing to cyberattacks, fires, and social unrest could partly jeopardize export prospects during fourth quarter 2021.
Main data releases incorporated in the update
The General Household Survey for 2020 has been incorporated into this release, topics that are heavily dependent on this information, such as household access to services, has been updated to 2020 values. The latest QLFS and GDP release has also been updated.
Enjoy the update!
The IHS Markit ReX team