July PMI drops from June, but still points to improved manufacturing activity

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The Absa Purchasing Managers' Index (PMI) for July 2020 declined slightly compared with June, but continued to signal a further month-on-month improvement for conditions in the manufacturing sector. The PMI declined to 51.2 index points in July, from 53.9 in June, thereby staying above the neutral 50-point mark for a third consecutive month. This suggests that official manufacturing output should still reflect a month-on-month improvement in activity, but that levels are stabilising and that July's increase is likely to be significantly less than those signalled by the PMI in May and June.

Despite ticking down slightly, the Business Activity Index remained at a very high level. The fact that more respondents signalled a further increase in output, compared with those seeing further growth in demand, could perhaps be explained by some firms producing more in an attempt to catch up on production lost during earlier stricter lockdown levels.

After a surge in June, the New Sales Orders Index declined in July, but remained well above the neutral 50-point mark, signalling a continued expansion in demand. Encouragingly, for the first time since October 2019, respondents noted a slight increase in export sales. On the local front, producers supplying the hospitality sector specifically remarked on continued weak demand, while those in the alcoholic beverages industry also reported a renewed drop in sales.

Importantly, despite sharp monthly improvements, some respondents noted that output remained below pre-lockdown levels, despite the sharp monthly increases signalled since the slump in April. This means that, on an annual basis, official output is still expected to be down in July.

The shape of the gross domestic product (GDP) recovery in Europe, a key market for South African manufacturing goods, will be important for local producers targeting the export market going forward. The notable rise in the Eurozone manufacturing PMI during July is positive in this regard.

A very worrying feature of the latest PMI survey is that the Employment Index remained particularly weak and, unlike the demand and activity indices, has barely recovered from the sharp plunge in April. Formal-sector employment tends to lag activity trends. The PMI employment indicator suggests that further job losses are likely after an initial hit to employment in Quarter 2.

After recording two sharp increases, the Inventories Index declined in July. The current level is below the average recorded in the first six months of the year.

The Supplier Deliveries Index edged down further in July after reaching a record-high in April. It is important to explain that this sub-component is inverted. If goods are less readily available and purchasing performance worsens, this is normally a sign of increased demand for manufactured products. Therefore, such a situation actually lifts the index. However, currently, goods are less readily available owing to supply chain disruptions caused by local and global production stoppages and other trade-related disturbances. The still high level of the index in July thus suggests that supply chains are not yet functioning normally.

After two consecutive increases, the Purchasing Price Index ticked down in July. The index declined to 72.4 points, which is just above the average recorded in the first six months of the year. The latest official Producer Price Index figures have come out much lower than suggested by the PMI's price index because the official price index is dragged down by significantly lower fuel prices compared with last year, while the PMI picks up on monthly trends.

Finally, purchasing managers turned slightly more optimistic about business conditions going forward. The index tracking expected business conditions in six months' time rose to 51.8 index points in July. While this is the best level in a year, it is still a fairly subdued reading compared with the series' long-term average which sits just above 60 points.

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