Financial services provider Absa reports that its seasonally adjusted purchasing managers’ index (PMI) declined further in October, falling to 53.6 from a downwardly revised 54.7 in September.

As was the case in September, Absa notes that the business activity and new sales orders indices lost the most ground in October, with at least two key developments in October contributing to the almost four-point drop, to 46.1, in the business activity index.

These two developments include the three-week strike in the steel and engineering sector and the return of Eskom load-shedding for notable periods during the month.

Seen in isolation, Absa says these adverse events had the potential to push the business activity index, orders and the overall PMI even lower.

However, there was also an important countervailing force in October – the move to Alert Level 1 lockdown restrictions and the sharp decline in new domestic Covid-19 cases in recent weeks – facilitating increased mobility.

Absa says this is likely to have supported consumer spending and may have shielded the manufacturing sector somewhat, and is particularly relevant in manufacturing subsectors that were not directly or indirectly impacted by the National Union of Metalworkers of South Africa’s (Numsa’s) strike in the steel sector.

Nonetheless, Absa notes that the almost five-point decline in the new orders index to below the neutral 50-point mark suggests that the demand for manufactured goods suffered a meaningful knock in October.

Absa’s PMI indicates slightly improved export sales in October, emphasising that it was domestic constraints that weighed on the demand for manufactured goods.

In terms of jobs, Absa reports that owing to the demand for, and the output of, manufacturing goods being under pressure in October, the employment indicator remained below the dividing line of 50.

As for price pressures, Absa’s PMI reveals that after forestalling the acceleration in the producer price index (PPI) for final manufactured goods in September, the PMI purchasing prices indicator fell back slightly in October.

However, because of the large fuel price hike in November, Absa says the reprieve on input cost pressures is likely to be temporary.

OUTLOOK

Absa says respondents to its PMI are “upbeat” about an improvement in business conditions over the next six months.

The company says that, as was suggested by the August PMI business activity reading, actual month-on-month Statistics South Africa (Stats SA) manufacturing production results rebounded strongly in August.

However, Absa says the increase was unable to undo the stark decline in July, with the September and October business activity readings indicating that the rebound in factory output likely stalled post-August.

As for new sales orders, Absa says this index dropped back below the key 50 mark in October, and that of interest were respondents refraining from highlighting load-shedding as a possible reason for this. Instead, respondents pointed to the negative spillovers from the Numsa strike, which seemed to be top of mind.

On a positive note, selected respondents mentioned a strong boost to sales from the move to Alert Level 1 lockdown restrictions, as well as from retailers starting to stock up for the Christmas holiday period. In this regard, Absa says pre-emptive stock-building in the retail sector may be a particular feature this year amid concerns about severe global supply chain constraints.

Regarding inventories, Absa reports that this index moved firmly above 50 in October.

Although easing somewhat, the supplier deliveries index remained elevated in October, hovering above 70 since July.

Considering local demand is still not strong, Absa says it can imagine that the longer lead times are a function of worsening global logistical bottlenecks. In this regard, the company says recent commentary from major global shipping groups suggests that these constraints could last well into 2022, and potentially beyond.

Further, the September Stats SA PPI report also hints at bottleneck pressures, including the impact of higher shipping costs. In this regard, categories including office appliances, general purpose machinery, as well as rubber and plastics saw surprisingly sharp month-on-month price hikes, Absa notes.

The purchasing price index remained well above 80 index points for the third month in a row. As a result, Absa says not too much should be read into the small decline in October, as the level of the index still points to a fast acceleration in input costs.

In this regard, Absa says that because of the very large fuel price hike in November, and significantly higher freight shipping costs, relief from input cost pressures is likely to remain elusive in the near term.