The Absa Purchasing Managers’ Index (PMI) declined from 52.2 points in June to 47.6 in July, suggesting that the manufacturing sector experienced a tough start to the third quarter following a weak second quarter, Absa says.

"This is the first reading below the neutral 50-point threshold since July 2021, when the looting and unrest in KwaZulu-Natal and Gauteng hurt output.

Electricity supply disruptions were the likely cause of the drop in production last month, Absa notes.

"Simultaneously, the international environment was also less supportive, with many developed countries’ PMI readings also weakening of late. Local purchasing managers turned decidedly more downbeat about business conditions going forward amid local electricity woes and concerns about global growth," Absa says.

On an yearly basis, production may look better compared with the weak July 2021 reading, but the sharp decline in the business activity index argues against a strong quarter-on-quarter rebound following an expected decline in second quarter, it adds.

The tumble in the business activity and new sales orders indices were the big drivers of the decline in the headline PMI. Both indices are deep in negative terrain and point towards weak domestic activity and demand.

Export sales were also lower, although to a lesser degree. The employment index dipped, albeit less so than activity.

"The new sales orders index moved deeper into negative terrain in July. Export sales declined, but a big drag likely also came from poor domestic demand. Relatively high stock levels and rising prices could have contributed to lower orders.

"Following a solid second quarter, the employment index dipped back below the neutral 50-point mark in July. The drop was, however, less pronounced than the sharp decline in activity," the PMI shows.

The inventories and supplier deliveries indices stayed above 50, returning to levels in line with those seen in May. The inventories index remained volatile and bounced back to May’s level.

Despite the recent volatility, the index, in general, has averaged much higher than in recent years. Sustained supply chain friction may have led manufacturers to stock up on input products in order to alleviate possible production disruptions, Absa says.

"Following a surge higher in June, the supplier deliveries index returned to May’s level. This suggests that supply chains are working somewhat smoother compared to the previous month, as the index is inverted, quicker deliveries result in a decline in the index.

"This would be in line with the experience globally. While problematic logistics and supply chains were still flagged in the responses, it featured less than in previous months. However, this could also be due to a decline in demand for inputs, which speeds up delivery," Absa says.

Meanwhile, on the cost front, the purchasing price index signalled the slowest pace of cost increases since the start of the year. Despite this, the index remains high compared with the long-term history of the series, which means cost pressures remain elevated.

"However, it does show price pressure at the start of the production pipeline likely peaked earlier this year. This would be consistent with producer and consumer price inflation moving higher in the next several months before an expected slowdown in the rate of increase towards the end of the year or in early 2023," the PMI states.

The index tracking expected business conditions in six months’ time dipped to 49.4 in July. This was the first time since the second quarter of 2020, during the strictest phase of South Africa’s Covid-19 lockdown, that respondents expected conditions to worsen going forward.

“It must be noted that the vast majority of responses were received before President Cyril Ramaphosa announced significant energy market reforms last week, which was generally well received and could have countered some of the pessimism,” Absa mentions.