For the fourth consecutive month, the seasonally adjusted Kagiso Purchasing Managers Index (PMI) has contracted; losing 2.1 points in December to 47.4, as challenging employment conditions in South Africa persisted.

The PMI approached the key 50-point mark in November, when it stood at 49.5.

Sponsor investment group Kagiso Tiso Holdings indicated that this downward trend was last observed during the 2008/9 recession.

Kagiso asset management research head Abdul Davids attributed the decline in the PMI largely to the employment index, which plunged by 7.4 points during the month to 44.7.

“This sharp decline comes amid bleak employment dynamics within the manufacturing sector and adverse sentiment towards labour following various strikes in the second half of 2012,” he added.

Statistics South Africa’s quarterly employment figures for the third quarter of 2012 revealed that employment growth in the manufacturing sector remained flat on a quarter-on-quarter basis and was lower by 4 000 workers on a year-on-year basis.

Davids, however, pointed out that more data was required before a conclusive outlook on employment prospects within the sector could be reached, as the PMI employment index had been volatile in the past years.

Meanwhile, production was somewhat more encouraging, with the business activity index gaining 1.4 points to reach 47.3; but, Davids noted, the sustainability of the increase was unclear. “Despite increased production, demand for manufactured goods remained weak during December, as evidenced by the 2.8 point decline in the new sales orders Index. At 44.9, new sales orders are at their lowest level since August 2009.”

The PMI also continued to suggest elevated input cost pressures, with the price index stabilising at a level of 79.7.

“Cost pressures arising from ever-increasing electricity and fuel prices and rising wage demands are placing significant strain on manufacturers who are struggling to compete globally. As a result, conditions within the local manufacturing sector are expected to remain challenging in the year ahead,” Davids stated.

Investec economist Annabel Bishop said in a note to clients that the moderating trend in the PMI was expected to continue into 2013, provided that strike action did not escalate.

“While the PMI tends to both overshoot and undershoot the actual manufacturing production figures, at times, the PMI outcome is likely indicative of a weaker manufacturing production growth outcome in December than in November,” she noted.

Manufacturing production was up 3.4% year-on-year in November on strong growth in the petroleum, chemical products, plastic and rubber products sector and a recovery in the motor vehicles, part and accessories and transport equipment sector. However, Bishop pointed out that activity in other sectors remained moderate to weak, under pressure from weak global demand.

Consequently, Investec revised its expectation for growth in South Africa’s manufacturing output downwards to 2.2% year-on-year for 2012.

Further, Bishop stated that the South African Reserve Bank was not expected to cut interest rates in January, as inflation was likely to exceed the target in 2013, unless evidence of a broad-based slowdown in economic activity emerged.