Manufacturing activity fell sharply in July reaching levels last seen in the same month in 2021 when the looting and unrest in KwaZulu-Natal and some parts of Gauteng hobbled production.
Economists said domestic shocks including the April floods and electricity supply constraints, as well as weakening global growth, are the reasons for the sharp decline in activity.
Absa’s purchasing managers’ index (PMI) released on Monday showed that manufacturing activity fell from 52.2 points in June and 54.8 in May to 47.6 in July, well below Investec’s expectations of a more neutral 50 index point reading.
The numbers reflect regulatory hurdles and the extremely slow pace of bureaucracy in the domestic energy sector, as well as a slowdown in international trade flows, shown in the contraction of new export business volumes for a fourth straight month.
Investec economist Lara Hodes said the heightened load-shedding, coupled with a number of other domestic challenges and a fragile global environment "have weighed heavily on sentiment”.
Absa senior economist Miyelani Maluleke said the international environment is less supportive with many developed country PMI readings also weakening. Local purchasing managers have turned more downbeat about business conditions in the future because of electricity woes and concerns about global growth, he said.
The global impact is especially true for Germany, which is one of SA’s most important trading partners, ranked second behind China and ahead of the US. The eurozone’s largest economy has also been hit by Russian gas supply cuts.
The Washington-based IMF now expects Germany to grow 1.2% this year and just 0.8% in 2023 — a figure almost two percentage points lower than estimated in April. This will weigh on SA exports.
The IMF warned that the risk of a recession is “particularly prominent” in 2023, because by then growth is expected to bottom out in several countries and stockpiles of savings amassed during the pandemic to have shrunk, and “even small shocks could cause economies to stall”.
SA’s manufacturing sector also took a big knock from the recent lengthy bout of rotational power cuts. The sector is the country’s fourth-largest industry and contributes 14% to overall GDP. In July alone, Eskom implemented power outages for 22 days, and at escalated intensities, which weighed heavily on confidence and economic activity.
Load-shedding was ramped up, reaching stage 6 at times, largely in response to unlawful industrial action at several power plants, and weighing on the already fragile electricity situation. The most recent manufacturing activity reading marks the first print below the neutral 50-point level.
The Absa PMI provides an early indication of underlying economic activity, with a reading above 50 points suggesting expansion in the sector, while anything below 50 points to a contraction. The index is based on a survey from respondents in the manufacturing sector conducted by the Stellenbosch-based Bureau for Economic Research, which covers activity such as new sales orders, business operations and employment.
A breakdown of the subindices shows that expected business conditions in six months’ time fell to 49.4 most recently, down by 4.4 points on a monthly basis.
“This is the least optimistic purchasing managers have been so far in 2022, and the first time since the second quarter 2020 that respondents expected conditions to worsen going forward,” Africa economist at Oxford Economics Jee-A van der Linde said.
Business activity fell to 39.8 in July from 46.0 in June, while new sales orders also dived into deeper negative territory, falling to 35.4 in July from 46.3 the previous month. Both indices point towards weak domestic activity and demand.
The employment index dipped back below the neutral 50-point mark in July to 47 from 51.7 in June.
Even though the index tracking purchasing prices was at its slowest pace since the start of 2022, falling from 89.8 in June to 87.5 in July, it remains high compared with the long-term series history, which means cost pressures remain elevated.
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