PMI – SA’s manufacturing sector performance disappoints

The seasonally adjusted Absa Purchasing Managers’ Index (PMI) had a tough start to Q3 2017, declining by 3.8 points to 42.9 in July. The headline PMI was last at such a depressed level in the second half of 2009 – a period of very weak underlying economic performance. All five of the major PMI sub-indices declined in July.

Of the major subcomponents, the seasonally adjusted Business Activity Index was under most pressure, declining by 6.1 index points, to a depressing 39.3. The significant decline was on the back of an even steeper fall in June. The actual Stats SA manufacturing production data for April and May, suggest that output in the sector posted a positive quarter-on-quarter growth during Q2 2017.

Improved Q2 performance not sustainable

Unfortunately, the July PMI data suggests that the improved Q2 performance is unlikely to be sustained. The weak activity levels in July were in line with the prevailing soft demand conditions in South Africa. This was reflected in the further easing of the New Sales Orders index, which fell by almost 4 points to 39.8, in July.

The weak demand and output conditions spilled over to the factory sector job market. The employment index lost 3 index points to 44.1. After a sharp downscaling of business expectations for the next six months in June, Purchasing Managers remained downbeat about business prospects in July – albeit slightly less so.

Manufacturing sector challenges

Against the backdrop of well-above 50 readings for the PMIs of some of SA’s major trading partners – including the Eurozone and the USA – the performance of the South African manufacturing sector remains most disappointing. The marginal 25 basis point reduction in the repo policy interest rate during July, may provide some boost to demand on the margin. However, the sector continues to face a number of headwinds, including the possibility of an extended strike in the metals and engineering industry.