'Lethal cocktail' contracts South Africa's economy

4 August 2011

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4 August 2011 | Adam Leach

Economic activity in South Africa declined steeply last month, falling to a two-year low.

The Kagiso Purchasing Managers’ Index (PMI) for July reported a drop of 9.7 points to 44.2, compared with June, hitting its lowest point since July 2009. While growth has slowed over the past three months, this is the first time the PMI has dropped below the critical 50 mark, which indicates contraction.

Speaking to SM about the report, André Coetzee, managing director of CIPS Southern Africa said: “It was quite a shock to the market, because they were under the consensus that the number they were going to be looking at was around 52, but this is a disastrous move.”

Coetzee believes the sharp drop was the result of a “lethal cocktail” of three factors. “First, the strike action we saw in July; second, global and local demand tapering off; and third, a lack of competitiveness. And the one thing we can say about that is the persistently strong rand.”

And he doesn't believe this latest PMI will be a momentary blip: “If you look at those three factors, I don't think they're going to go away soon.”

The report also found that the rate of new business orders dropped by 9.2 points, inventories by 10 points and employment dropped from 47.7 to 39.1. Purchasers looking for a shred of good news can grasp onto the fact that input costs eased marginally to 75.

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