PMI paints poor picture for manufacturing activity recovery

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manufacturing_trouble_100.jpgThe seasonally-adjusted Absa Purchasing Managers' Index (PMI) erased most of last month's gains as it fell to 45.4 index points in May 2019, down from 47.2 index points in April 2019. Barring a drop to 45 index points in March 2019, this is the weakest level since October 2018. The decline brought the average PMI for the first two months of Quarter 2 of 2019 to 46.3 points, below the Quarter 1 of 2019 average of 47.1 points.

"This, unfortunately, does not bode well for a recovery in activity in the manufacturing sector after output declined notably on a quarter-on-quarter basis in Quarter 1", said the Bureau for Economic Research (BER).

Three of the major sub-components declined when compared to April, while the Suppliers' Deliveries and Employment Indices rose. The index tracking supplier performance remains the only main sub-component that is above the neutral 50-point mark.

Indeed, despite improving somewhat in May (with 1.3 points), the Employment Index stayed well below the neutral mark at 43.2 points.

The New Sales Orders Index dipped lower in May after an encouraging improvement in April. The index now stands on 44.4 points. The survey indicates that export orders remained positive, which suggests that the downturn is as a result of weaker domestic demand.

The deterioration in orders most likely contributed to a sharp drop in business activity, which failed to hold on to last month's gain and thus slumped back to 43.5 index points in May. The Business Activity Index has not managed to edge above the neutral 50-point mark in 2019, which suggests sustained pressure on manufacturing output.

The Inventories Index also weighed on the headline PMI as said index fell further following a steep 7.6-point decline in April. This sub-index fell to 41.6 points in May and is currently more than 11 points below a recent high reached three months earlier.

The index tracking expected business conditions in six months' time remained unchanged at 62.3 index points. This is more than 4 points above the average recorded during 2018, which means that respondents remain fairly optimistic that conditions will improve going forward.

Somewhat surprisingly, the Purchasing Price Index declined further in May. Whereas factory-gate price inflation, as measured by the Producer Price Index (PPI), has increased of late, the PMI Price Index is currently at its lowest level in a year. It is not immediately clear what is driving the difference. However, the PMI might reflect a general lack of price pressure in the South African economy as firms absorb rising input costs in order to protect sales volumes.

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