Having plunged to an all-time low of 5.1 index points in April, financial services provider Absa’s Purchasing Manager’s Index (PMI) survey rose sharply to 43.2 index points in May, propelled by many factories returning to production in May when South Africa went into Alert Level 4, the bank reports.

Many survey respondents report that production was still well below normal capacity in May, but nevertheless higher than that recorded in the previous month.

Absa Corporate and Investment Banking economist Miyelani Maluleke says the sharp rise in the business activity index in May is relative to virtually nothing in April and still suggests very subdued overall activity levels.

The Steel and Engineering Industries Federation of Southern Africa (Seifsa) notes that the uptick in PMI bodes well for the manufacturing sector. “The rebound of the PMI into an expansionary zone in May, despite a very difficult economic environment, provides insight to the eagerness of local purchasing executives to get back to work and restart production processes,” says Seifsa economist Marique Kruger.

She adds that, given the difficult economic context, businesses have to remain resilient and rejig local supply chains. The performance of the PMI, Kruger says, is therefore encouraging, as the lead indicator plays a vital role in influencing how producers and relevant stakeholders in the broader manufacturing sector view the month ahead.

The positive performance is particularly welcome as most of the sub-indices performed better in May 2020 compared with April 2020, she says.

However, worryingly, Maluleke points out that some respondents indicated that whereas the lockdown regulations in May would have enabled a further ramp-up of production, there was insufficient demand to warrant this.

Indeed, the new sales orders index did not rebound to the same extent as the output index.

Further, the employment index remained stuck at an all-time low, increasing by a marginal 0.2 points to 26.8 in May.

Maluleke also notes that the sharp month-on-month movement in the output index in May should be visible in the official manufacturing production data. Accounting for this, April is likely to see an unprecedented drop, with a solid month-on-month rebound expected in May.

However, assuming Alert Level 3 (or lower) is maintained for the entire country during the full month of May, output should recover further during June, he states. Indeed, the PMI’s expected business conditions index rebounded in May from an all-time low reached in April, rising to the best level since mid-2019.

However, factory output levels will take longer to recover to levels pre-Covid-19, he warns. This will be affected to a large extent by supply-chain disruptions having to be filtered out of the system and for international, as well as local, demand to return to normal.

Further, there is a risk that load-shedding could reappear as large power consuming factories and businesses resume operations and ramp up, thereby further hampering any potential recovery.

Maluleke highlights that the South African economy was already struggling before the Covid-19 pandemic began in South Africa.

In early 2020, the business activity and new sales orders indices of the Absa PMI had already fallen to levels last seen during the recovery from the 2008/9 recession.

The increase in the output and new sales orders indices supported an increase in the headline manufacturing PMI which rose to 50.2 index points in May.

However, in these unique circumstances, he says it is better to look at the subcomponents, instead of headline PMI, as this is not only the case in South Africa, but also internationally where the supplier deliveries index inadvertently lifts the headline PMI.

“This subcomponent is inverted which means that when goods are less readily available than before and delivery performance worsens, this actually lifts the index,” says Maluleke.

This is because in normal times, an order that takes longer to be delivered is indicative of increased demand by the manufacturing sector for inputs in the production process.

“Last month, and to a lesser extent in May, Covid-19-related production stoppages disrupted the supply chain to such an extent that deliveries were slower even without increased demand,” concludes Maluleke.