HSBC on Tuesday launched South Africa’s first purchasing managers index (PMI) that looks at the whole economy, including manufacturing, services, construction, mining, and retail.
The research indicated that growth was improving in South Africa with PMI rising to 51.5 in October, although it warned that it was still slow as the country battled to deal with slow international growth and internal constrains.
According to HSBC’s research, PMI last month was up from 49.8 in September, its biggest expansion in 10 months.
The survey reflects the change, if any, in the current month's readings compared to the previous month. Readings above 50% signal an improvement in business conditions in the previous month, while a score below 50 represents a deterioration.
David Faulkner, economist at HSBC said there was a pick-up in new orders and slightly higher output. He expected year on year growth to pick up from 2.1% to 2.2% in the second quarter year on year.
He said while "strike action had provided headwinds to third quarter GDP growth, the recent PMI survey supports a more optimistic outlook for the final quarter of the year."
He said the survey had factored in a slight slowing of activity in the first quarter of next year, which usually occurred close to election.
"The PMI suggests an improvement in private sector conditions in October as the economy rebounded from a strike affected September. A robust pick up in new orders and a small rise in output explain most of the improvements while employment levels expanded marginally in line with positive but weak growth," said Faulkner.
"The improvement in economic conditions appears to be domestically driven," he said.
The PMI study shows that new export orders contracted in October, suggesting that "weak external demand and underlying competitiveness challenges continue to restrain exports," he added.
Some respondents linked the weaker exports to the rebound in the Rand in October, which may have reduced some of the South Africa's competiveness.
Government estimates that the country will expand at 2.1% before recovering to 3% next year. Asked why HSBC foresaw slightly lower economic growth of 2.7%, which is behind government estimates, Faulkner said: "The combination of sluggish household consumption and sluggish private investment combined to bring down our forecast for domestic demand" next year, he said.
He said stymied job creation, lower consumer confidence, high household debt and credit extensions moderating, were also taken into consideration.
Faulner said household debt levels are presently 75% of disposable income, down somewhat from debt levels of 80% in 2007, which meant this debt was still comparably high.
"There will be a limit in the future to how much household credit can pick up, so it will be down to what happens to gross disposable income, which is a product of wage settlements and employment," he said.
He saw the repo rate remaining at 5% throughout 2014 as many of the conditions remained the same in South Africa.
The HSBC study also estimates that investment growth will increase from between 3% and 4% to about 5% he said. "It will be a slight pick up, but not enough to drive the economy."
The new index will make it possible for data from South Africa to be compared to that of PMI data from 17 other emerging markers in which HSBC does similar studies.
The gauge measures 400 private companies in South Africa's construction, manufacturing, mining, retail and service industries, unlike other indicators that look only at manufacturing. This Faulkner felt gave a better picture of the South African economy.
The survey’s produced with Markit on behalf of HSBC are available in 32 countries.
Andrew Dell, chief executive of HSBC Africa said the new index, which will be released monthly, "will help inform financial markets, analysts and local policy makers" about the economy’s performance.