After a strong start to the year, the seasonally adjusted Kagiso Purchasing Managers Index (PMI) fell to 48.2 in the second quarter, the lowest since August 2011, sponsor Kagiso Tiso Holdings said on Monday.

The domestic PMI moderated in June, losing 5.4 index points, which dampened the outlook for overall gross domestic product growth in the second quarter.

Kagiso head of research Abdul Davids said the state of the local manufacturing sector appeared to be more in line with its key export markets, such as Europe and China.

“In addition to weaker external demand, the latest figures indicate a sustained and worsening slowdown in domestic demand, as the new sales orders index, the largest weighted subindex, fell by 5.2 points to reach a level of 46.5,” he explained.

Efficient Group economist Merina Willemse told Engineering News Online that although the local slowdown could be attributed to declining demand globally, the fact that local businesses were still struggling to pay off debt, also played a role.

“Manufacturing is not going to do very well, last year we saw an average growth of 2.2% to 2.3% and this year it is the same. However, with no real stimuli coming from overseas it might be worse. Even if there is growth in overseas economies, it will be slow,” she indicated.

Kagiso stated that there was nothing in the June numbers to suggest a quick turnaround in the fortunes of the manufacturing sector, as almost all the key subindices posted meaningful losses.

The business activity index was the hardest hit, registering a fall of 9 index points to 47 points, the lowest level since mid-2011 when industrial action weighed heavily on factory sector output.

The PMI leading indicator, measured as the ratio between new sales orders and inventories, remained well below 1 at 0.85.

The index measuring expected business conditions in six months’ time declined by 1.6 points to 57.4.

The PMI employment index eased back below 50 to 46.8, suggesting that the May jump to 53 was an outlier, rather than the start of an improved trend for factory sector employment.

“The fall back below 50 does not necessarily imply that manufacturers are shedding jobs…the PMI continues to reflect a sector that is not in a position to increase employment on any grand scale,” Kagiso warned.

Manufacturing Circle executive director Coenraad Bezuidenhout said that if domestic manufacturing was to protect, or even grow the employment it currently offered, a review of monetary policy to support a more competitive exchange rate was overdue and that “urgent action” was required to level the playing fields in respect of trade.

He told Engineering News Online it was also of great importance that local procurement efforts gained momentum and that the South African consumer was made to realise the importance of buying local to support job creation and increase revenue for service delivery.

Meanwhile, input cost pressures moderated significantly, with the PMI price index losing 8.5 index points to reach 65.1. The continued decline in the oil price and other raw material prices seemed to have outweighed the impact of the rand exchange rate, which continued to trade at weaker levels versus the US dollar.

Actual producer price inflation moderated from a peak of 10.6% year-on-year in October 2011 to 6.6% during April and May.

Willemse attributed the drop in cost pressures to globally declining resource prices.

“Generally this is a good thing, because it means manufacturers are going to produce cheaper and prices might feed through to the consumer at a lower level, therefore helping us to keep inflation lower. But lowering commodity prices are also a clear indication that the economy is really struggling,” she pointed out.

However, Willemse maintained that although the latest numbers were disappointing, it was still relatively higher than that of most other developing and developed markets.

“The manufacturing industry, as a whole, is also on a better foot than the mining industry,” she stated.

Bezuidenhout said the drop in global demand not only affected South African manufacturers in terms of slowing export orders, but also in terms of the proliferation of unfairly incentivised imports being pushed onto the local market, particularly from South East Asia, to compensate for declining demand elsewhere.

“This would explain the slowdown in domestic demand indicated by the PMI,” he noted, adding that Kagiso’s finding that easing cost pressures had kept price inflation in check concurred with the Manufacturing Circle’s contention that a more competitive rand held benefits for South African manufacturing and the economy as a whole.

“This was equally evident in the final quarter of 2011, when a sustained weaker rand saw the manufacturing sector gaining strength domestically,” he said.
 

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