Financial services provider Absa reports that its seasonally adjusted Purchasing Managers’ Index (PMI) rebounded to 57.9 points in August.

This followed the record single-month decline to 43.5 points in July, compared with 57.4 points in June.

The bank states that although a normalisation of demand and output for businesses affected by July’s looting and a further boost from less strict lockdown restrictions meant that a recovery was always on the cards, the extent of the rebound is nonetheless encouraging, especially on the orders and activity front.

However, even if September’s headline PMI remains at the elevated level seen in August, Absa says the index for the third quarter as a whole will be lower than that of the second quarter owing to the severity of the shock experienced in July.

Business activity came in at 58.5 points and new sales orders at 60.9 in August – both about 30 points better than July’s figures.

In addition to a recovery from the looting shock, subsectors with strong links to the hospitality and liquor industries likely experienced a rise in domestic demand following the easing of lockdown restrictions.

Absa says respondents to its PMI survey also noted an encouraging rise in export sales.

The inventories index also recovered July’s losses to reach 54 points.

The bank notes that these movements reflect month-on-month changes from an “extremely” weak July, with the impact on the official production statistics being more pronounced in the monthly rate rather than the yearly rate.

Nonetheless, Absa says that although to less of an extent than earlier in the year, the yearly figure may still benefit from a lower base set in 2020.

BUSINESS ACTIVITY
Bucking the general upward trend of the major PMI subindices was the employment index, which Absa says edged down somewhat further relative to the previous month, albeit that this index had not declined to the same extent as the others in July.

Respondents to the PMI survey also turned somewhat less optimistic about business conditions going forward, the bank notes, stating that the index tracking expected business conditions in six months’ time fell to 59.7 in August, from 64.3 in July.

Absa says renewed concerns about the strength of the global economic recovery amid the spread of the Delta variant may have contributed to this decline.

Also, cost pressures for manufacturers remain elevated, with the PMI improving after four consecutive declines, likely driven by a higher fuel price at the start of August and a weaker rand exchange rate, on average.

Absa adds that a return to normal production levels for businesses negatively affected by the looting in July would have already resulted in a significant improvement in output relative to the previous month.

As for new sales orders, the bank’s PMI staged a strong recovery in August and even surpassed June’s level, with domestic demand likely normalising following the looting shock in July, while the easing of some lockdown restrictions towards the end of July also supported orders.

Contrary to the general positive movements in the other indices, the employment index dipped lower in August, following a four-point decline in July.

According to the latest Quarterly Labour Force Survey published by Statistics South Africa, the factory sector shed a further 105 000 formal sector jobs in the second quarter relative to the first quarter. In this regard, Absa notes that the weak readings of the employment index in July and August relative to the second quarter highlight the risk of further factory job losses in the third quarter.

For inventories, this index more than recovered from July’s losses and rose to 54 points in August, and although slightly above June’s level, still below the average recorded in the second quarter when producers seemed to have been on a restocking drive.

The supplier deliveries index dipped in August, albeit that the index remains about ten points above the May low of 58.7. This suggests that although bottlenecks likely eased somewhat relative to July, supply chains are still not working at full capacity.

Absa says this is because this index is inverted, so longer delivery times owing to goods being less readily available, actually lift the index. Normally, in times of undisrupted supply chains, this is seen as a sign of increased demand from manufacturers, the bank says.

Furthermore, following four consecutive declines, the purchasing price index rose in August, likely largely driven by the fuel price hike at the start of the month.

With the decline in the Brent crude oil price outweighing the slightly weaker rand exchange rate in August, diesel prices have come down somewhat at the start of September, says Absa.

However, while the official producer price index (PPI) for final manufactured goods likely peaked in June, the bank says the underlying indices continue to signal price pressures in the supply chain. For example, Absa says the PPI for intermediate goods still rose by 17.6% year-on-year in July.