PMI off to slow start for 2014 - retrenchments hit 10-yr high



SlowStart.jpgThe seasonally adjusted Kagiso Purchasing Managers’ Index™ (PMI™) remained unchanged at 49.9 index points in January 2014. The fact that the PMI was just below the neutral 50-point mark suggests that the factory sector experienced a slow start to the new year, said Abdul Davids, Head of Research at Kagiso Asset Management.

January’s Business Activity and New Sales Orders indices weakened as demand remained fairly subdued. The Business Activity Index fell for the second consecutive month to reach 48 – its lowest level since March 2013.

“Business activity at such a low level is not conducive to actual manufacturing production growth in the first quarter of 2014,” said Davids. His remarks are supported by labour specialist Adcorp's announcement that South Africa’s weak economy continued to shed jobs in January, with retrenchment levels at a 10-year high.

Adcorp’s Employment Index report on Monday showed that the economy shed 36 290 jobs last month, most of them in manufacturing and construction. The report tracks what happens to jobs on a monthly basis while the more official quarterly employment data is released by Statistics SA.

"The retrenchment rate is now at a 10-year high while the job mobility rate is at a 10-year low," Adcorp labour market economist Loane Sharp said.

In contrast, the Euro zone’s manufacturing sector started 2014 in much better shape than expected. The preliminary PMI reading showed underlying demand for manufactured goods was at its strongest level in nearly three years, lifting the headline index to a 32-month high of 53.9 index points. However, the Chinese manufacturing PMI dipped below 50 index points, adding to concerns that growth in the world’s second largest economy is slowing.

The deterioration in the Business Activity and New Sales Orders indices was balanced by a more pronounced improvement in Employment and Inventories.

After declining by five points in December, the Employment Index rose to 50.7 points in January. The index has been hovering around the 50-point mark for a few months and, according to Davids, this may signal a stabilisation in labour demand after continued job shedding following the 2008/09 recession.

The Price Index surged from 80.1 in December to 89.3 in January – its highest level since mid-2008. “This sharp increase is likely due to the weaker Rand elevating the costs of imported input goods,” says Davids.


AbdulDavids2.jpgThe Inventories Index rose from 46 points to 53.9 in January. The rebound in inventory levels without an accompanying improvement in new sales orders does not generally bode well for production going forward. However, Davids points out that manufacturers may have stocked up in anticipation of further input price increases.

Despite tough conditions, manufacturers were still optimistic as the index measuring Expected Business Conditions in six months’ time rose by 3.5 points to 61.4. “Given that local demand is likely to remain relatively weak, manufacturers may be expecting a boost to exports due to improved demand from the Eurozone and a possible competitive edge from the weak rand,” says Davids. However, he cautions that the combination of higher inventory levels and weaker orders does not bode well for future production.

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