Manufacturing activity remained in contractionary territory for a sixth consecutive month in July, falling the most since July 2021 when SA experienced deadly riots and looting that erupted in KwaZulu-Natal and parts of Gauteng sparked by the jailing of former president Jacob Zuma.
The decline in industrial production, captured in Absa’s Purchasing Managers’ Index (PMI) in partnership with Stellenbosch University’s Bureau for Economic Research, shows industrial activity was not only affected by the return of more intensive power cuts, but also by delays in receiving inputs during the transport disruptions on the N3 corridor in that month.
The index, which fell to 47.3 in July from June’s already low 47.6, remaining below the 50 neutral mark that separates expansion from contraction suggests a weak start to economic growth in the third quarter and will impact the second half of the year.
Economists say forward-looking factory data suggests there will be continued strain within SA’s economy and that the same factors that have been dogging it since the start of the year remain in full force.
Index data shows that the headline reading was most affected by the business activity index, which tanked by almost 11 points.
The sub-index, which registered at 38.1 in July compared to June’s 48.9 reflects the impact more intensive power cuts had on manufacturing sentiment in July.
While Eskom’s energy availability factor (EAF) — a measure of electricity output as a share of total installed generation capacity — improved slightly in the last week of July, recording 59% on the last day of the month, it declined from about 75% 10 years ago to 65% in 2021.
In 2022 the power utility’s EAF dropped to 57% and it stood at about 52% for the year to June.
SA experienced 75 days of load-shedding in 2021. This increased to 205 days in 2022, and the country is on track for a record number of load-shedding days for 2023, negatively impacting the R513bn sector in real gross value-added terms.
Manufacturing is SA’s fourth-biggest sector, comprising 11.2% of the economy in the first quarter of 2023, down from 15% in 1995. The sector employs almost 1.2-million people, according to the first quarter of 2023 quarterly employment statistics, which is a survey of formal business establishments.
The energy-intensive sector has been hit hard by rotational power outages, which have seen manufacturing activity remain in contractionary territory since February. The unreliability of Eskom’s coal generating fleet continues to be a major risk to growth.
A substantial rise in the supplier deliveries index to the highest level so far this year can also explain the headline reading.
Absa said the headline PMI was kept artificially afloat in July by the meaningful rise in the supplier deliveries index, reaching its highest level this year to 59 in July from 47.4 previously, as supply chain disruptions can also lengthen delivery times without any rise in demand.
Absa bank said the manufacturing hubs around Johannesburg were particularly hard hit by the shipment delays.
Africa economist at Oxford Economics Jee-A van der Linde said the supplier deliveries index suggests that supply chain issues relating to the transport disruptions on the N3 corridor through the month of July also explain the large fall in business activity.
The BER-Absa index shows the new sales index was not only affected by the disruptions on the N3 but also by SA’s restrictive monetary policy, which Absa says will most likely weigh on domestic demand going forward.
Van der Linde said while the restrictive monetary policy is now most likely weighing on domestic demand, weak activity in major European export markets could also be curtailing foreign demand for locally manufactured goods.
He said weak activity in major SA export markets, including the eurozone and the UK, could also be curtailing foreign demand for SA manufactured goods.
The data also shows the employment index eased further to 47.4 in July from 47.9 previously, remaining below the neutral 50-point mark.
On a more positive note, the PMI purchasing price index moved down notably in July to 64.8 from June’s 71.3, signalling that the meaningful moderation in the annual rate of increase for the producer price index in recent months still has some legs.
Update: 1 August 2023.
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