PMI declines sharply and ends in contraction

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The seasonally adjusted Kagiso Purchasing Managers Index (PMI) declined by 5.4 index points in June, with most of the sub-indices declining significantly declines. At 48.2, the Index is at its most depressed level since August 2011.

This moderation in manufacturing production has dampened the outlook for overall GDP growth in the second quarter of 2012.

After a strong start to 2012, the state of the local manufacturing sector now appears to be more in line with its key export markets, Europe and China, says Abdul Davids, Head of Research at Kagiso Asset Management. "In addition to weaker external demand, the latest figures indicate a sustained and worsening slowdown in domestic demand as the New Sales Orders Index, the largest weighted sub-index, fell by 5.2 points to reach a level of 46.5."

The Business Activity Index recorded the largest decline, falling by 9 index points to 47. Davids points out that this Index was last at these levels in mid-2011 when factory sector output was negatively affected by industrial action. "While the three-month average for the Index still indicates that production expanded during the second quarter, it points to much slower growth and further weakness to come" he says.

After a surprising and welcome gain in May, the Employment Index eased back below 50 to 46.8. The May increase appears to have been an outlier rather than the start of an improving trend for factory sector employment, says Davids. However, he explains that the Index's retreat does not necessarily imply that manufacturers are shedding jobs. "Most of the respondents reported that employment levels were actually stable between May and June," he says. "It therefore appears that while the factory sector is not shedding jobs, it is not increasing employment either."

On a more positive note, input cost pressures moderated significantly, with the Price Index losing 8.5 index points to reach 65.1. "The continued decline in oil and other raw material prices seems to have outweighed the impact of the rand exchange rate, which continued to weaken against the US dollar," says Davids.

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