PMI improves but local factory sector continues under pressure

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Factory_output.jpgWhile South Africa’s PMI recovered slightly in June, edging up to 46.6 index points from 44.3 in May, the poor PMI readings for May and June suggest that actual factory output remained under pressure in Q2”, says Abdul Davids, Head of Research at Kagiso Asset Management, that compiles the index.


The slight recovery was driven mainly by a sharp increase in the Employment Index to 49.3 in June from 37.2 in May.


May’s Employment Index reading was relatively low compared with recent levels that came in closer to 50 index points, “which implies that the index returned to more normal levels, rather than suggesting a fundamental improvement in the job market,” noted Davids.


The average PMI for Q2 (at 46.1) was below the neutral 50-point mark and the first quarter’s 50.6 index-point average.


“However, the manufacturing sector’s contribution to GDP might be less negative in Q2 compared with Q1 - mainly owed to the solid actual production figure for April (as reported by Statistics South Africa).”


Davids notes that South Africa’s PMI remained well below international levels.


“In the US, the flash manufacturing reading rose to 57.5 index points – the highest level since May 2010, and the preliminary Chinese figure also showed fresh signs of strength. Activity in the Eurozone slowed to a seven-month low in June, but the flash index (at 51.9 index points) still signalled growth.”


On the negative side, both the New Sales Orders and Business Activity Indices inched lower.


The New Sales Orders Index fell to 43.9 index points from 44.8, while the Business Activity Index fell for a third straight month to 39.5 index points - firmly in contraction territory. The continuation of the platinum mining strike during most of June most likely weighed on the already weak domestic demand environment, commented Davids.


“The slow but steady ramping-up of production after the strike was resolved late in June should support demand for some of the manufacturing sub-sectors in coming months.”


The Price Index rose slightly to 73.8 index points (from 70.8 in May) but remained significantly below the average reading for the first quarter of 92.5 points.


Despite on-going tough conditions, respondents remained optimistic about an improvement in Expected Business Conditions in six months’ time. The index fell slightly to 58.3 in June from 59.6 in May.


The PMI Leading Indicator (the ratio between new sales orders and inventories) fell further below level one, not boding well for future production growth.


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