Absa Retail and Business Bank’s head of new-sector development, Justin Schmidt, argues that the Absa Purchasing Managers Index (PMI) remaining above the neutral 50 level for the fourth consecutive month in September is indicative of the manufacturing sector’s continuing recovery from the Covid-19 lockdown shock
The Absa PMI is a measure of month-on-month variation in activity in the manufacturing sector. The September PMI was the fourth consecutive month with a reading above the neutral level of 50. A reading above 50 shows that most manufacturers experienced an increase in their activity levels. This, therefore, offers signs of our continued recovery from the Covid-19 lockdown shock.
Another indicator that the worst is behind the sector is the fact that the third-quarter Absa Manufacturing Survey results showed an improvement in business conditions and confidence. Overall, manufacturing business confidence rose to 22 index points in the third quarter, the highest confidence level recorded for the year to date. Confidence in the second quarter reached a record low of 6 index points. (The index ranges between 0 and 100, with 0 reflecting an extreme lack of confidence and 100 extreme confidence.)
Recent Statistics South Africa data give further insights into the recovery. We saw high month-on-month volume increases of 28.5% and 21.3% in May and June respectively, followed by more subdued month-on-month increases of 5.9% and 3.6% in July and August respectively. Sales value figures followed the same trend. Importantly, the manufacturing sector traditionally achieves more sales in the second half of the year, with the peak months for sales being September, October and November.
While there are good initial signs pointing to a recovery, it is critical to have a more detailed understanding of the nature of the recovery, especially when considering the base effects we may be seeing. The year-on-year manufacturing numbers in August for production (–10.8%) and sales (–11.5%) show that, while momentum remains positive, we have a lot of lost ground to recover. Overall activity levels remain below prepandemic levels and we are still far from ‘normal’ levels.
Although the positive momentum is good news, the speed at which we recover lost manufacturing sales and production is essential. If we do not recover the lost demand and record growth from that base level of demand, this will constrain the sector’s prospects in the long term. This would manifest in lower confidence levels and therefore constrain investment by manufacturers.
Respondents to the third-quarter Absa Manufacturing Survey were asked how likely they are to invest in capital expenditure over the next 12 months. Much of the sector is pessimistic about these future investments. Manufacturers responded that they are least likely to invest in additions, with replacements also likely to be under pressure. This pessimism has been driven by concerns around the political climate and a lack of demand for manufactured goods.
Investing in replacements or additions improves efficiencies, drives down costs and is key to long-term competitiveness. Therefore, given the previous headwinds facing the sector, this stated hesitance to invest is a concern, especially when considering that manufacturing is a key sector to South Africa’s economic recovery and will need to be competitive locally and internationally.
The worst might be behind us, as evidenced by increasing sales, a lower likelihood of load-shedding and higher confidence levels. However, for the majority of manufacturers to feel confident enough to reinvest in their own businesses, we need to see demand recover to pre-Covid-19 levels and grow from there.
Schmidt heads New Sector Development in Retail and Business Banking at Absa – Justin.Schmidt@absa.africa