South Africa’s seasonally adjusted Absa Purchasing Managers’ Index (PMI) has moved into expansion for the first time this year, but analysts have cautioned that the improvement may not be sustained in the coming months.

The PMI, which gauges manufacturing activity, measured 52.1 index points in July, up from 46.2 in June. This is the first reading above the neutral 50-point mark since December 2018.

The PMI improvement was well supported by the underlying subcomponents, with four of the five major subcomponents coming in above the neutral 50-point mark, signalling an expansion in activity. 

However, Absa said that, given growing concerns about the health of the global manufacturing sector, “it remains to be seen” whether this improvement can be sustained.

Financial services company Investec's Kamilla Kaplan also said that the increase in the PMI to back above the 50-mark “may prove unsustainable in the coming months”.

While purchasing managers continue to expect conditions to improve in six months’ time, they are less optimistic than before.

The expected business conditions index declined to 54.5 index points in July, down from 62.3 points two months before, and more than 12 points below the level recorded at the start of 2019.  

In July, the new sales orders index rose for a second consecutive month, with the reported improvement in demand likely having contributed to the rise in business activity.

As a result, both indices rose above the neutral 50-point mark.

The purchasing inventories index also moved back above the neutral level to reach 50.9 points, after averaging 42.5 points in the preceding three months.

“It is not clear what the catalyst for these notable increases was. It may be that a number of manufacturing firms in, or supplying to, sectors that are busy with wage negotiations, increased output, or saw increased demand for their products in July, to guard against possible strike-related production disruptions,” Absa noted, adding that, should this be the case, the notable upward moves in July were unlikely to be repeated.  

Investec agreed, stating that forward-looking indicators pointed to challenging operating conditions.

“Specifically, survey respondents were less optimistic regarding the outlook for production over the next six months. Moreover, input buying and employment continued to fall, albeit at a slightly slower pace than in the prior month,” Kaplan said.

Job prospects in July remained bleak, with the employment index only ticking up to 43.1 index points, remaining in deep negative terrain. 

The index tracking purchasing prices erased most of June’s gain, and dropped back to 67.9 index points in July. Apart from May’s reading of 67.7 points, this is the lowest level since May 2018.

Looking ahead, Kapan believes that activity in the manufacturing sector is likely to be restrained by weak export prospects and muted domestic demand.

On the export side, growth is expected to be constrained by the effects of subdued global economic activity and trade, which Investec noted should be “particularly evident in the performance of manufactured goods and export”.

The last global manufacturing PMI for June confirmed that global new export orders fell at the fastest rate in six years. Against this backdrop, South Africa’s manufacturing sector can be expected to continue suffering from weak momentum.