The Absa Purchasing Managers’ Index (PMI) declined by 3.1 points to 54.1 in December, but remained in expansionary territory.

All the major subcomponents of the PMI, excluding inventories, were lower in December, and the key 50-point level for the employment index in November proved short-lived, as the index recorded a significant decline in December.

The business activity index lost five points to 49.5 in the fourth quarter, and the index averaged well above the weak level of 43.1 recorded in the third quarter.

"However, the fourth-quarter average was still notably lower than the average of almost 57 points recorded in the second quarter of 2021. This suggests that while actual manufacturing production should post quarterly growth in the fourth quarter, the level of output is likely to remain below where it was in the second quarter," the PMI report, produced by the Bureau for Economic Research on behalf of Absa, states.

The new sales orders index declined to 51.7 in December, after recovering to 54 in November from the notable decline to 48 in October amid the steel sector strike and load-shedding. Given a sharp decline in export sales during December, it seems that domestic demand was more resilient in the latter stages of 2021, the PMI shows.

"Of interest in the new sales orders index was a more than ten-point decline in the export index. While it is not clear what drove the notable export easing, slower services sector activity in the Eurozone amid a surge in Covid-19 infections and an associated tightening in lockdown restriction in several countries at the end of 2021 may have contributed," the report says.

Further, the weak state of factory sector employment was highlighted in the third quarter of 2021 quarterly employment statistics from Statistics South Africa, which showed a 2.2% year-on-year, or 25 000, decline in manufacturing sector employment. Considering that 2021 was a recovery year from the 2020 crash, this is a particularly poor outcome, the PMI highlights.

"There were a few other noteworthy moves in the key PMI subcomponents during December, all of them negative. The employment index recorded a significant decline of more than eight points to well below the neutral 50 level.

"Although we would caution not to read too much into a single month’s print, the employment dynamics need to be watched. The weakness in the employment indicator could be seen against the backdrop of reduced optimism about future business conditions," the PMI states.

Additionally, the index measuring expected business conditions declined for the third month in a row to 53.1.

Meanwhile, the inventories index increased for the third consecutive month from 57.2 in November to 57.9 in December. Manufacturers gearing up to meet festive season demand and perhaps proactively building stocks in the event of prolonged supply chain disruptions, in line with the move from a just-in-time to a just-in-case approach to managing inventories, could help to explain this.

Further, at 69.6, the supplier deliveries index remained elevated in December, suggesting lengthy lead times. However, it was the third month running that the index moved somewhat lower.

"This may suggest a slight easing of supply-side bottlenecks, a trend that was also evident in some of the global PMI data for December. However, some of the Absa PMI respondents in December again flagged raw material shortages," the PMI states.

The news on the input cost front was also not encouraging, with the purchasing price index having increased further to 89.8 in December to reach the highest level since early in 2016. Among other factors, the combination of weak employment dynamics and fast-rising input costs complicates upcoming domestic monetary policy decisions.

"This suggests that we have not seen the end of the recent sharp annual rise in the official producer price index. On a more positive note, the fuel price decline in January should provide some relief from price pressures in early 2022, the PMI states.