PMI suggests improving but tough environment

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Manufacturing_PMI.jpgAfter declining to 49.3 in March, the seasonally adjusted Kagiso Purchasing Managers' Index (PMI) increased by 1.2 points to 50.5 in April.


"The PMI for April show marginal improvements amid challenging conditions and the outlook for the sector is relatively more positive," says Abdul Davids, Head of Research at Kagiso Asset Management.

The improvement is largely attributable to the index's two largest-weighted subcomponents, the business activity and new sales orders indices.


The business activity index gained the ground it lost in March and increased by 4.5 points to 52.2 in April. "While this is a positive sign, the level of the index suggests that manufacturing production remains under pressure," says Davids.


The new sales orders index increased marginally by 1.7 points to 53.7, indicating a slight improvement in the demand for manufactured goods.


The 8.6 point decline in the inventory index is due to manufacturers cautiously lowering stock levels in the face of uncertain economic conditions, particularly in Europe and China. "Our key trading partners continue to grapple with tough conditions. Preliminary PMI results for April show that the Eurozone reached a four-month low of 46.5 while China dropped to a two-month low of 50.5," says Davids.


On a positive note the PMI leading indicator (which expresses new sales orders as a ratio of inventories) moved above 1.1. A level above 1 suggests that inventory levels are low relative to demand and usually bodes well for future manufacturing production. "However, the operating environment remains challenging as manufacturers face muted demand and relatively high input prices. Although the price index declined notably in April, the relatively high level still indicates that manufacturers face significant input cost pressures, predominantly from higher fuel, electricity and labour costs," cautions Davids.


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