PMI down 1.2 points, but began Q3 strong

The seasonally adjusted Barclays Purchasing Managers’ Index (PMI) fell by 1.2 index points to 52.5 in July. Despite the slight drop, the current level still signals that the sector experienced a reasonably strong start to Q3 2016 after a robust performance during Q2, reports the Bureau for Economic Research.

The PMI remains in line with recent Eurozone manufacturing PMI readings (a key export market for South-African produced goods). Initial data releases suggest that the Eurozone economy has so far remained relatively resilient after the UK’s brexit vote, which is encouraging for the local sector’s export performance going forward.

The decline in the headline PMI was mainly driven by a 4.8 point drop in the business activity index to 49.5. This is five points below the 54.5 point average recorded in Q2 2016.

The PMI leading indicator rose back above one in July, suggesting that output growth may pick up again going forward. In fact, the new sales orders index signals that the recent improvement in demand was sustained in July with a slight increase to 54.4 index points. Demand seems to be supported by improved export performance, with some respondents still noting significant weakness in the domestic economy.

On a positive note, the price index fell by 9.3 index points to reach 72.1 points – the lowest level since April 2015. The decline was likely driven by a stronger rand and the lower international oil price. The combination of these factors led to a significant decline in the fuel price on 3 August, providing input cost relief for manufacturers (and consumers).

With (export) demand holding up and upward pressure on costs lessening somewhat in July, purchasing managers were also more optimistic about business conditions going forward. The index measuring expected business conditions in six months’ time rose to 55.4 in July, up from 52.9 in June. This means that, barring any unexpected disruptions to output, the sector could continue its recovery during the second half of 2016.