The seasonally adjusted Absa Purchasing Managers’ Index (PMI) rose to 51.5 index points in July, up from 47.9 in June.
The current level, which is above the neutral 50-point mark, suggests that the manufacturing sector got off to a good start in the first month of the third quarter of this year.
The recovery was driven by an improvement in demand, the PMI explained, with the uptick in demand filtering through to higher business activity.
With the output index having managed to edge above 50 index points for the first time since February, Absa and the Bureau for Economic Research (BER) pointed out that this contributed to an increase in the employment index.
However, Absa and the BER lamented that the inventories index had remained below the neutral 50-point mark in July.
Despite current conditions seemingly having improved, purchasing managers turned pessimistic about the expected conditions going forward.
The index tracking the expected business conditions in six months’ time declined to 48.7 index points in July, from 55.7 in June.
This, Absa and the BER said, was the first time since August 2017 that manufacturers expected conditions to deteriorate going forward, instead of improving.
Part of this, the parties explained, is because current conditions are better than they have been in recent months, so an improvement from this more elevated level may be less likely than from tougher conditions before.
Additionally, prospects for exporters may be more subdued owing to concerns about the potential negative impact on global growth from the wave of US trade protectionism measures.
Meanwhile, manufacturers are also battling with increasing cost pressures.
A key driver of the recent upward trend has been several straight months of fuel price increases. However, the fuel price remained virtually unchanged at the start of August.
The business activity index rose by 4.5 index points to 50.3 after two consecutive months of declines. This level, Absa and the BER said, is the best since February this year.
The new sales order index recovered from June’s losses and rose to 52.8 index points in July, rising to slightly above the average recorded in the second quarter.
Despite being relatively volatile, the parties noted that the new sales orders index has so far performed significantly better in 2018, compared with the second half of 2017.
This suggests that demand is slowly on the mend after a weak 2017.
Further, the employment index increased by 4.8 index points in July, the highest since early 2016.
The inventories index also saw an increase to 48.5 index points in July, from 47.9 in June, thereby remaining below the neutral 50-point mark.
The purchasing commitment index edged marginally lower to 44.6 index points in July, after remaining unchanged at 45 points in June.
The purchasing price index, however, increased sharply for a second consecutive month in July. At 83.6 index points, the index is at its highest level since early 2016, and almost 20 index points above May’s reading of 65.5 index points.
A key driver of the recent increases is higher fuel costs, which is an important input cost for most manufacturers. The weaker rand exchange rate, compared with the start of this year, has also contributed to an increase in the cost of imported intermediate goods and raw materials.
For similar reasons, the most recent official Producer Price Index also accelerated sharply, with its inflation rising to 5.9% year-on-year from 4.6% in May.