Employment reduction in the manufacturing sector was becoming a growing concern, the Manufacturing Circle warned on Wednesday, as the latest Kagiso Purchasing Managers’ Index (PMI) showed that the index had slipped below the neutral 50-point level to 49.9 points in December.

Although the PMI had averaged 51 points for the fourth quarter of 2013, signalling a slight expansion in the manufacturing sector, Kagiso Asset Management head of research Abdul Davids pointed out that the Kagiso PMI was now below that of South Africa’s main trading partners.

"Activity in the eurozone rose at its fastest pace in two-and-a-half years in December and is now comfortably above the key 50-point level. In the US, the ISM manufacturing PMI declined somewhat, but, at 57, remains at a fairly high level,” he noted.

BNP Paribas Cadiz Securities economist Jeffrey Schultz commented that the deterioration in the December PMI was disappointing, adding that it continued to point to an industry under strain from a weak global and domestic demand environment and elevated input cost pressures.

After declining for four consecutive months, the price index increased from 77.8 to 80.1 points, as the weak rand placed upward pressure on the prices of imported input products like fuel.

Further, the business activity subindex fell 4.7 points to 49.3 in December, suggesting a slowdown in production growth, Kagiso stated. However, the subindex averaged 52 for the fourth quarter, with Kagiso noting that the index’s readings for October and November indicated a relatively strong rebound in production after the third-quarter slump caused by the prolonged strike in the vehicle manufacturing sector.

The Steel and Engineering Industries Federation of South Africa (Seifsa) said it was cautiously optimistic that growth in the business activity subindex would continue, despite the December “setback”.

Seifsa chief economist Henk Langenhoven warned, however, that the extreme volatility observed in the manufacturing sector since 2007/8 was of concern, noting that such volatility was “highly detrimental” to investment, production expansion and employment creation.

Meanwhile, the new sales orders subindex rose for the third consecutive month to reach 51.8 points in December; however, the average reading for the fourth quarter remained the lowest for the year.

Further, the employment subindex fell from a relatively high level of 50.8 to 45.8 points in December. Davids noted that this deterioration was expected, given that the manufacturing sector had struggled to create sustained employment growth since the 2008/9 recession.

“The depressed levels of employment in the manufacturing sector remain concerning and leaves us less than optimistic that this side of the economy is going to be able to create meaningful employment any time soon," said Schultz.

The Manufacturing Circle added that the December PMI confirmed previous indications by the organisation that manufacturing employment would remain vulnerable.

OPTIMISM
Kagiso stated that, despite the mixed results of the December PMI, purchasing managers remained relatively optimistic about the first half of 2014. While the subindex measuring expected business conditions in six months’ time declined slightly to 57.9 points, it remained at a high level.

“This sentiment was also reflected in the PMI leading indicator, which rose above one for the first time since August 2013. This indicates that inventories are below expected demand, which generally bodes well for future production in the manufacturing sector,” the company added.