Financial services firm Absa’s Purchasing Managers’ Index (PMI) decreased further by 1.5 points to 40.5 points in December and remains firmly in the range indicating contraction.

However, an unusually sharp decline in the inventories index, as well as a steep decline in the employment index, were the main drivers of the weaker headline reading, the bank notes.

The headline PMI thus signals that conditions in the sector remained tough, but activity may have improved nonetheless. The index has been in contractionary territory for 11 of the 12 months in 2025, underscoring the persistence of weak underlying conditions, Absa notes.

Business activity actually improved sharply during the month, albeit remaining below the 50-point mark.

The business activity index increased by 9.4 points to 46.1 in December, up from 36.7 in November, but lower than 49.4 in October. While remaining below the neutral level, the jump was significant relative to usual month-to-month changes. The index has been in contractionary territory for 11 of the 12 months. Weak demand remains the main force hindering sector performance.

The inventories index declined by 9.9 points to 36.1 in December from 46 in November, which is the lowest since May 2020, when they stood at 35.1 points. This is primarily owing to the constant weak demand, as there has been no evidence of prior overbuying. It appears that manufacturers are destocking in response to uncertain economic conditions, aiming to manage costs.

Further, the index tracking expected business conditions in six months’ time jumped by a significant 18.1 points to 68.8 in December. This is the highest level since the 70.8 reached in September 2024.

New sales orders were barely changed from November and remained at a subdued level. Relative to November, the new sales orders index dipped marginally to 35.4 in December.

The decline in sales was primarily driven by the domestic economy, as there were some improvements in export orders. However, these were insufficient to make a significant contribution to a turnaround in demand.

The employment index decreased by 6.3 points in December to 39.9 index points, falling further below the neutral 50-point mark and remaining in contractionary territory since April 2024.

The weak performance in business activity and volatile sales orders continues to limit the scope for hiring, while shortages of specialised skills in certain niche industries also weigh on employment outcomes, Absa says.

Only strong economic growth and recovery will lead to better employment outcomes, it adds.

Further, the supplier deliveries index remained at similar levels, edging down to 45.1 points in December from 45.5 in November.

The purchasing price index declined further by 4.5 points to 50 in December, which is the lowest level since late 2009.

While the fuel, and particularly diesel prices, increased at the start of December, the stronger rand exchange rate likely helped alleviate input cost pressure. The sharp decline in diesel prices at the start of this year is expected to further help contain price pressures in the new year.