PMI: December decline suggests manufacturing growth/recovery levelling off

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PMI_pandemic_levels_100.jpgThe seasonally-adjusted Absa Purchasing Managers' Index (PMI) declined further to 50.3 index points in December 2020, down from 52.6 in November. This is the lowest level since July 2020.

The reading just above 50 index points suggests that growth is levelling off in the manufacturing sector after solid month-on-month gains were recorded in the wake of April 2020's lockdown-induced plunge in activity.

"Despite a strong start in October 2020, the average reading for Quarter 4 is basically unchanged from Quarter 3, which suggests that while another quarter-on-quarter uptick in manufacturing output is likely, the pace of the recovery momentum has slowed", noted the Bureau for Economic Research (BER) in a statement.

Worryingly, the Business Activity Index fell to 44.9 index points in December. The index declined to a level below the neutral 50-point mark for the first time since May 2020. Strictly speaking this means that manufacturing output declined compared with the previous month.

Furthermore, after already slumping below the neutral 50-point level in November, new sales orders declined further in December to 45.2 points. This is below the average of 53.7 points for Quarter 4 and a solid 62.5 average recorded in Quarter 3. As was the case in November, a deterioration in export orders seems to have contributed to the decline in overall orders.

Early 2021's second wave of COVID-19 and the accompanying renewed lockdown restrictions will also likely negatively influence domestic demand, particularly from the liquor and hospitality sectors. The return of load shedding, especially when not contained to the late evenings, also argues against a strong rebound in January 2021.

The index tracking expectations for business conditions in six months' time was largely unchanged from November at 52.9 points compared with readings well above 60 just three months prior.

In addition to the below-50 readings of the Activity and Orders Indices, the Employment Index was the biggest drag on the headline PMI in December. This index fell to 43.8 points from November's 47.2. The latest Quarterly Employment Statistics (QES) from Statistics South Africa show that the sector regained only 8 000 formal jobs in Quarter 3 after shedding 91 000 jobs in Quarter 2. "The renewed downtick in the Employment Index, after reaching a high in October, suggests that the employment recovery will likely continue to be very subdued", noted the BER.

As was the case in the previous few months, the Inventories and Supplier Deliveries Indices added positively to the headline figure.

After losing October's gains in November, the Inventories Index rose to 53.6 points in December, remaining above the neutral 50-point mark for a fourth consecutive month.

The Supplier Deliveries Index ticked up to the higher end of its recent range of about 60 to 64 index points. While this is significantly below the record high reached in April 2020, the current level remains elevated compared with the series history. The persistent high level points to some remaining, or perhaps even renewed, friction in the supply chain. This is because 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 and thus actually lifts the index. However, other factors, such as lockdowns and production stoppages, can also distort the supply chain and inadvertently lift the index.

There was also some good news on the price front, with the Purchasing Price Index moving lower for a second consecutive month. The index, which tracks the changes in input costs for manufacturers, declined to its lowest level since February 2020. This was despite an increase in the diesel price at the start of the month, but supported by (on average) a stronger Rand exchange rate which lessens the cost of imports (in Rand terms).

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