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September PMI continues to reflect manufacturing weakness

1st October 2015

By: Megan van Wyngaardt

Creamer Media Contributing Editor Online

  

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The seasonally adjusted Barclays Purchasing Managers’ Index (PMI) remained virtually unchanged at 49 points in September, up from 48.9 in August.

The average for the third quarter was 49.8 index points, slightly better than the 49.2 recorded in the second quarter, but still below the neutral 50-point mark.

In a telephone interview, Barclays Africa economist Miyelani Maluleke told Engineering News Online that the PMI still faced a very weak rating, indicating challenging conditions in the manufacturing sector.

“However, the PMI improved quarter-on-quarter, so it is unlikely to see the contraction from the second quarter repeat itself in the third quarter, while the chances of a rebound are also very slim,” he said.

While the headline index remained unchanged, the major subcomponents moved in different directions month-on-month. On a positive note, the new sales orders index rose for a second month to 51.9 index points and the employment index increased to 49.5.

Maluleke pointed out that the sales orders index climb was surprising. “Most other indicators have remained negative, so perhaps this improvement suggests that parts of the manufacturing sector that do export are getting a competitive boost from the continued weakness in the exchange rate,” he said, adding that the change in the employment index was also encouraging, particularly in the context of retrenchments in the sector.

“This improvement suggests that manufacturers see levels stabilising over the near term, but we are also not going to see big improvements any time soon. In an environment that is so challenging, even a little good news, is great,” he stated.

However, the weak rand – pushing up the cost of imports – was also the likely driver of a 1.3-point uptick in the price index. The increase was despite a hefty fuel price decline that came into effect at the start of the month.

Meanwhile, the improvement in new sales orders did not filter through to increased output levels. The business activity index fell further to 46.6 index points, from 48.6 in August. Also weighing on the headline PMI was the 3.7-point decline in the suppliers’ performance index, which fell to its lowest level since August 2009.

The inventories index also dropped to 50.3 index points. Given the slightly higher reading on the new sales order index, the PMI leading indicator edged above one for the first time this year.

Barclays said this suggested that production could pick up somewhat going forward.

However, purchasing managers were more pessimistic about business conditions in six months’ time.

The index measuring expected business conditions fell to 49.3 in September, following a 10.7-index point drop to 52.5 in August. Barring a single-month dip to 47 index points in March 2013, this index was now at its lowest level since early 2009.

The factory sector was likely to face continued headwinds from weak domestic consumer demand. Manufacturers could also be increasingly concerned about possible adverse spillovers from the slowdown in China’s economy and its impact on commodity prices and producers, including the local mining sector.

Commenting on the PMI, Investec economist Annabel Bishop said the reading pointed to further deterioration in manufacturing production, which had a negative impact on general economic activity.

Further, the leading indicator of the business cycle has fallen year-on-year since 2013, with the lagging indicator also evincing a downward trend.

“South Africa has seen economic growth slow consistently since 2011, while pricing pressure from the demand side has dwindled and private sector employment growth weakened. With the business cycle indicators declining, the country’s business cycle appears to be in a downward phase,” she noted.

Further, Bishop highlighted that the country’s long-term growth trend since 1994 could be estimated at close to 3% a year, with economic growth of the past three years below this and gross domestic product (GDP) growth of 1.5% year-on-year expected this year, also underperforming the trend.

“Real GDP contracted in the second quarter, while industrial production was in recession in the first half of the year, and this could extend into the third quarter.

“Real income growth also fell sharply and has been on a marked downward trend since 2011, pulling household consumption expenditure growth down with it.”

Bishop added that it appeared that the current business cycle met many of the criteria defining a downward phase.

BNP Paribas Cadiz Securities economist Jeffrey Schultz agreed, noting that the still weak levels continued to point to a pressurised climate for the supply side of the economy.

“While a weaker rand seems to be generating some modest benefit to manufacturers in terms of export competitiveness, we remain cautious over the outlook for manufactured exports, given weakening global trade volumes and economic pressures in China.

“This, coupled with the more idiosyncratic risks faced by the domestic economy through electricity supply cuts, poor labour relations and weak demand, should keep a lid on domestic manufacturing prospects over the near to medium term,” he said.

Edited by Chanel de Bruyn
Creamer Media Senior Deputy Editor Online

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