Pointing to a further improvement in conditions in South Africa’s manufacturing sector, the Absa Purchasing Managers’ Index (PMI) increased to 57.3 index points in August, up from 51.2 in July, in line with Covid-19 lockdown restrictions easing further to Level 2 in August.
This resulted in both business activity and new sales orders increasing in August − not only as a result of South Africa moving to a lower lockdown level, but also supported by an uptick in export orders.
This provides some level of reassurance to companies in the Metals and Engineering (M&E) sector, says Steel and Engineering Industries Federation of Southern Africa chief economist Dr Michael Ade.
He says the PMI’s performance in August, despite a tough domestic operating environment, provides insight to the improving perception held by company executives, as they aim to further improve on production with the easing of Covid-19 restrictions.
Crucially, Absa notes that, while the level of the PMI is now well above pre-pandemic levels, it is unlikely to be the case when the actual manufacturing activity data for August is released.
Absa states that the performance of the PMI during lockdown has shown that the level of the headline index is arguably less informative than the month-on-month movements – this is both in terms of the direction (up or down) and the magnitude of the monthly change.
According to Absa, actual manufacturing activity crashed in April, but subsequently recorded strong monthly increases in May and June as foretold by the uptick in the PMI’s activity index in those months.
The PMI suggests that the recovery stalled in July, but likely found renewed momentum in August.
Absa says it will take months of strong month-on-month growth to return to the actual level of activity recorded prior to the start of the nationwide lockdown in late March. This is in consideration of the magnitude of the drop recorded in April and the continued restrictions placed on the manufacturing sector until recently, as well as physical distancing measures possibly still preventing many factories from returning to full capacity.
Production levels in some subsectors may indeed be back or even exceed pre-Covid-19 levels in August, but Absa says overall activity is likely to still be lower.
“Indeed, while activity and demand are clearly recovering from extremely low levels, the employment index remains significantly more subdued. This also underscores the point that the uptick in activity is not resulting in output that exceeds current production capacity,” the bank states.
Ade, meanwhile, says the leading indicator, which acts as a preview to industrial activity before it happens, is slowly picking up and provides a basis for businesses to use excess capacity, boost production and increase their overall contribution to economic growth.
“Correspondingly, the increase in the PMI is important in influencing how producers and relevant stakeholders in the broader manufacturing sector view the coming month, enabling them to confidently place orders in advance.”
The inventories and employment indices continue to be the main drag on the headline PMI.
Encouragingly, Ade says all the subindices performed well in August when compared with July, with the new sales orders subindex having increased from 53.4 points to 71.7 points, the employment subindex having increased from 33 points to 39 points and the production sub-index having risen from 62.9 points to 67 points.
“It is important for companies to build on the encouraging signs of green shoots in industrial activity to improve their chances of survival and maintain existing jobs,” he says.
Despite the level of the PMI more than likely overstating the extent of the recovery, the renewed increase in the PMI in August is encouraging, notes Absa, adding that it seems to be supported by both local and export demand improving.
Further, Absa states that purchasing managers have turned notably more optimistic about future business conditions. The index tracking expected business conditions in six months’ time rose to the highest level in about 18 months.
Ade says the uptick in industrial activity is in line with broader domestic economic activity, which is slowly picking up with the easing of lockdown restrictions, as evidenced by the latest set of business-cycle indicators from the South African Reserve Bank.
However, he cautions that it is still important for employees to remain vigilant and not drop their guard and that employers should place an emphasis on both the economy and the health of their workers, since the worst of the Covid-19 pandemic is not yet over.