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Aug 01, 2012

Manufacturing index recovers, but demand remains weak

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Africa|Kagiso Tiso Holdings|Africa|China|South Africa|United States|Contracting|Manufacturing|Manufacturing Sector|Abdul Davids
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The seasonally adjusted Kagiso Purchasing Managers Index (PMI) gained 2.8 index points in July to reach a level of 51 after contracting to below the key 50-point level last month, sponsor Kagiso Tiso Holdings said on Wednesday.

However, Kagiso Asset Management head of research Abdul Davids said South Africa’s manufacturing sector remained under strain, owing to lower demand from key export markets.

Kagiso said in a statement that the improvement in the index was broad-based, with most of the subindices showing gains.

The new sales orders index was the largest contributor, having increased by almost 6 index points to 52.2, but Davids pointed out that this result did not necessarily suggest stronger demand.

“The increase in the new sales orders index was not driven by a greater number of managers reporting increased orders, but rather by the fact that orders remained unchanged. This, therefore, indicates that demand appears to have stabilised following the steady decline we have seen since February,” he explained.

Similarly, the business activity index gained 3.8 points to reach 50.8 after the majority of managers indicated that activity levels remained unchanged from June to July.

Despite higher oil and commodity prices in July, the price index continued to decline and was currently at 62.7, its lowest level since the end of 2010. “As a result, we expect Statistics South Africa’s producer price index, which has remained steady at 6.6% year-on-year for the last three consecutive months, to start moderating,” Davids said.

Further, after declining by more than 6 points in June, the employment index increased marginally during July to reach 47. Davids stated that this confirmed that employment prospects in the local manufacturing industry remained limited and were expected to persist for the remainder of this year.

Looking ahead, the index measuring expected business conditions over the next six months was expected to decline to 54, its lowest level since September 2011, as purchasing managers continued to lower their expectations.

“This is a clear signal that conditions in the local manufacturing sector will remain weak for the foreseeable future,” Davids indicated, adding that weaker anticipated business conditions were in line with current conditions in China and the US, where the latest flash PMI readings came in at 49.5 and 51.8, respectively.

 

Edited by: Mariaan Webb
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