PMI sub-components tank: manufacturing during April lockdown at near standstill

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Virus_image_100.jpgThe Business Activity Index of the Absa Purchasing Managers' Index (PMI) survey crashed to an all-time low of a mere 5.1 index points in April 2020. The decline means that manufacturing output came to a near standstill during the nationwide lockdown, with almost all respondents reporting a decline in activity compared to the previous month.

Indeed, many respondents indicated that zero production took place during the lockdown. While some essential goods production continued during April, this was concentrated within specific sub-sectors.

The current reading is about 25 points below the lowest level recorded during the global financial crisis, which suggests that the decline in actual manufacturing output will be well in excess of the drop recorded at the time (a 23% annual fall in April 2009).

With no to little activity in the local economy, overall demand for manufactured goods also plummeted. While the New Sales Orders Index has moved steadily lower since mid-2019, the index plummeted to a much lower level in April. The index is now more than 20 points below the lowest level reached in early 2009 during the global financial crisis.

As with activity, almost all respondents indicated that demand was lower than in March. Exports turned out slightly less negative but, nonetheless, plunged to record-low levels.

Supplier performance suffered the same, deteriorating further in April.

Owing to the inadvertent positive boost from supplier deliveries (the index shot up in April), the headline PMI fell only to 46.1 index points in April from 48.1 in March. While the boost from supplier deliveries seems to go against the clear trend observed in the other sub-components, it is important to note that this index is inverted, which means that slower deliveries actually lift the index. Under normal circumstances, slower lead times point to increased activity, however, COVID-19-related production stoppages have disrupted the supply chain to such an extent that delivery times have slowed even without an increase in demand.

This means that the headline PMI reading does not provide a fair reflection of conditions on the factory floor in April. Most global manufacturing PMIs are affected and, in fact, lifted by this unique occurrence. The focus should thus rather be on the sub-components of the PMI.

The PMI survey shows the immediate, devastating impact that the lockdown had on manufacturing output and overall demand. While the easing of restrictions in May should aid a slow recovery in the coming months, a lot of manufacturing capacity will remain idle for some time. Indeed, the index tracking expected business conditions in six months' time ticked down further from a record-low already recorded in March.

The Employment Index tracked activity lower but did not decline by the same margin. About half of the respondents indicated that employment levels were unchanged compared to March. This was despite activity and demand flatlining. Unfortunately, the remainder of the respondents reported a decline in their staff complement. Importantly, formal-sector employment tends to lag activity trends, which means that further job losses will likely follow.

In terms of purchasing prices, the index remained unchanged in April at 71.4 index points. This was likely owing to movements in the two main drivers of input costs, the Rand exchange rate and the Brent Crude oil price, cancelling each other out. The Rand exchange rate weakened significantly compared to March and Brent Crude oil prices fell sharply. May's further decline in the fuel price may alleviate some cost pressure for manufacturers re-opening their factories. However, the regulatory requirements of COVID-19 screening and other facilities will bring additional costs.

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