PMI slightly down after 3-month improvement: remains above Quarter 1 average

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PMI_April2021_200.jpgFollowing three consecutive months of improvement, the seasonally-adjusted Absa Purchasing Managers' Index (PMI) declined slightly to 56.2 index points in April 2021, from 57.4 in March. Despite the modest pullback, the index is now about 2.5 points above the average recorded in Quarter 1 of 2021 and about 26 points above the April 2020 reading recorded during the strictest phase of South Africa's COVID-19 lockdown.

Encouragingly, for the first time since early 2012, all five sub-components of the PMI were in positive terrain. Even the sub-component most often trailing below the 50-point mark, the Employment Index, managed to rise by a solid 10 points to reach its highest level since 2007. While the increase is encouraging, it is still too early to tell if this points to a sustained improvement in job creation in the manufacturing sector.

Business activity continued to increase in April, albeit at a much slower pace compared with March. The index fell back to 50.8 points in April from 56.1 in March.

New sales orders remained robust, although also increasing at a slightly slower pace than in March, with the index declining from a solid 60.4 points to 58.7. Purchasing managers continued to report improved export sales. Export-orientated manufacturers could continue to benefit from the global economic growth recovery, which is expected to accelerate through the remainder of the year.

Indeed, led by a booming United States economy, prospects for the global economy have brightened further of late. This could, in part, explain why respondents turned notably more upbeat about expected business conditions in six months' time. The index rose to a three-year high of 67.9 index points from an average of 58.5 points recorded in Quarter 1 of 2021 and a dismal 27.3 points seen this time last year. Furthermore, although the risk of a third wave of COVID-19 infections remains present, relatively low increases in new local infections during April may also have underpinned the recovery in sentiment. This does mean that, should virus metrics turn less favourable, sentiment could once again sour. Another factor that could quell sentiment is the continued increase in cost pressures.

The Purchasing Price Index came down slightly from a five-year high reached in March but remained elevated. The Rand exchange rate strengthened slightly compared with March, which could have helped with the costs of imported raw materials and intermediate goods. However, the latest official data from Stats SA points to cost pressure building in the manufacturing supply chain. The Producer Price Index (PPI) for intermediate manufactured goods measured 11.2% year-over-year (YOY) in March 2021, while the PPI for final manufactured goods rose by 5.2% YOY in March - the fastest pace since mid-2019.

Along with a sharp increase in the fuel price at the start of the month, annual producer prices are set to increase markedly in the next few months.

The Inventories Index declined slightly in April but remained firmly above the neutral 50-point mark for a third consecutive month.

After surging higher in March, the Supplier Deliveries Index fell back to February's level of 61.7 points. This is still high compared with its long-term history, which is likely owing to continued supply chain frictions and perhaps even shortages of raw materials. However, more positively, this could, to some extent, also be driven by demand from manufacturers picking up by more than expected, resulting in suppliers struggling to keep up. This is also observed in some international PMI surveys. It is worth remembering that this sub-component is inverted: if goods are less readily available, this is, normally, a sign of increased demand for manufactured products and actually lifts the index. However, it must be noted that other factors, such as lockdowns or material shortages, can also distort the supply chain, lengthen delivery times and inadvertently lift the index.

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