PMI: activity continues to improve as lockdown easing lifts production levels

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PMI_June2020_200.pngThe Absa Purchasing Managers' Index (PMI) for June 2020 showed that conditions continued to improve in the South African manufacturing sector. This is after most of the sector came to a near standstill during the nationwide Level 5 lockdown in April 2020 and only partially returned to normal production levels in May 2020.

The headline PMI rose further to 53.9 index points in June, up from 50.2 in May.

Importantly, while the headline PMI rose to a multi-year high, this does not mean that the level of actual manufacturing production rose to a multi-year high. "Instead, the further rise in June merely means that a solid month-on-month increase was likely recorded", said the Bureau for Economic Research (BER).

The same holds true for the sub-components.

Following solid improvements in May, business activity and new sales orders both continued to recover in June, after having plunged to record lows in April.

For the Business Activity Index, a month-on-month increase makes sense as under June's Level 3 regulations more factories were allowed to return to production, or allowed to ramp up production further, compared with Level 4 in May. While respondents noted that June output was higher than May, it was still below normal. Official production data should thus reflect a sharp month-on-month improvement in May and June, but still be significantly lower on an annual basis for both months.

Continued restrictions in some non-manufacturing sectors of the economy (for example, the hospitality industry) still weighed on demand and limited the need to ramp up production. Exports also remained weak in June. As such, on an annual basis (i.e. compared with June 2019), "actual manufacturing output is still likely to record another steep decline in June and it will take some time before the level of output returns to pre-pandemic levels", noted the BER.

The improved demand in certain sectors in June pushed the New Sales Orders Index up by a significant margin. The current level is the highest in more than ten years (this does not mean that overall demand stood at a ten-year high, but that the increase in demand from month-to-month was significant). The record decline caused by the lockdown in April was always likely to be followed by a strong initial recovery once the economy started to re-open. "Respondents noted that export sales were still lower, so the uptick is driven by a recovery in domestic demand from ultra-depressed levels", explained the BER.

While the consecutive month-on-month improvement in activity is encouraging, it is worrisome to note that the Employment Index remained extremely weak. This underscores that activity is merely slowly returning to normal and remains below full capacity (the index remained below the level recorded during the 2008/2009 economic recession). Further job losses in the sector, and the rest of the economy, could limit the overall recovery in demand.

The Inventories Index recorded a further sharp increase after plummeting to a mere 20 index points in April. Unlike activity and sales orders, however, the index remains below the neutral 50-point mark.

The Supplier Deliveries Index declined further as COVID-19 supply chain disruptions dissipated somewhat. In April, May and (to a lesser extent) June, the worsening of supplier performance was owed to supply chain disruptions caused by production stoppages and other disturbances.

The Purchasing Price Index rose for a second month in June to reach its highest level since September 2019. While the Rand exchange rate was (on average) stronger compared with May, the average Brent Crude oil price was sharply higher. This led to a fuel price increase at the start of June, lifting input costs. A further fuel price increase in July will put further upward pressure on costs. The latest official Producer Price Index (PPI) figure still showed a sharp downward move in factory-gate prices in April, but this was mainly owed to the sharp drop in fuel prices that month.

Purchasing managers turned more optimistic about expected business conditions. For the first time since July 2019, respondents expect conditions to improve in six months' time. The index tracking expected business conditions rose to 51.2 index points in June, after plunging to a mere 29.9 in April. This is still a fairly low level for this index, which averages above 60 points over the long-term.

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