PMI push eases in November - manufacturing recovering, but needs greater demand

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PMI_Dec2020.jpgThe Absa Purchasing Managers' Index (PMI) declined to 52.6 index points in November from the solid 60.9 points recorded in October. The decline comes after three consecutive upward moves and brings the index to the lowest level since July 2020.

While still signalling an improvement in business conditions, the drop suggests that the manufacturing sector's recovery is starting to lose momentum. This was to be expected as output levels for many subsectors are nearing pre-pandemic levels and will need sustained growth in demand to fuel a further output expansion, noted the Bureau for Economic Research (BER) in statement.

In this regard, it was worrying to see the new sales orders index dip back below the neutral 50-point mark for the first time since May. This was in part driven by a renewed decline in export sales, which could possibly be linked to lower activity in Europe owing to the renewed COVID-19 lockdowns, noted BER.

This, as well as concerns about coronavirus developments in South Africa, likely explains why purchasing managers turned less positive about business conditions going forward.

The indicator tracking business conditions in six months' time dipped for a second month to 52.7 index points and is now about 12 points below the level of just two months ago. While positive news regarding vaccine developments may result in an improved global growth outlook over the medium term, the next six months remain highly uncertain.

In addition to the decline in the new sales orders index, the other four components of the headline PMI also declined from their October levels. However, encouragingly, both business activity and inventories still signalled expansion (with an index level above 50 points). Even so, the fact that both indices fell by about 10 points suggests that the pace of the recovery has slowed significantly.

Furthermore, the employment index dipped lower in November. Unlike the other indices, the employment index failed to push through the neutral 50-point mark in its recovery from the lockdown-induced slump in April. However, it must be said that the current level remains slightly above the long-term average for this index.

The supplier deliveries index is significantly below the record high reached in April, yet remains elevated compared with the series history. The persistent high level points to some remaining friction in the supply chain with some respondents noting shortages of steel in particular. This is because this subcomponent is inverted: if goods are less readily available and purchasing performance worsens, this is normally a sign of increased demand for manufactured products and actually lifts the index. However, production stoppages and other trade-related disruptions can also distort supply chains and inadvertently lift the index.

Finally, after reaching a two-year high in October, the purchasing price index fell in November. The deceleration in cost pressure was likely driven by the, on average, stronger rand exchange rate, which lowers the rand-cost of imported raw materials and intermediate goods. However, if the current shortage of selected raw materials continues, it also has the potential to raise input costs.

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