Manufacturing activity slipped back into negative territory in March, signalling the effect of cost pressures on manufacturers driven mainly by increases in the fuel price.
Even as the electricity supply crunch abated in March, with the month experiencing the lowest level of load-shedding intensity so far in 2024, Absa’s purchasing managers’ index (PMI) fell to 49.2 points in March from 51.7 points previously.
The 50-point mark separates expansion and contraction. The February reading was the first reading above the neutral mark since August 2023. With the drop back into contractionary territory, the PMI suggests tepid demand may also be responsible for the malaise in the sector.
SA’s manufacturing sector still faces many risks and uncertainties, such as the return of load-shedding, bottlenecks in Transnet’s logistics infrastructure and policy uncertainty before the elections.
The index, produced in partnership with the Bureau for Economic Research (BER) remained below the 50-point mark for most of 2023, with the decline in January highlighting a sharp deterioration in demand and activity at levels last seen during the global financial crisis in 2008-09 and the lockdown during the Covid-19 pandemic in 2020.
Manufacturing’s recovery is crucial for the country’s economic prospects as it has the potential to boost exports, investment, innovation and job creation. Manufacturing is a R513bn sector in real gross value-added terms and comprises 11.2% of the economy, down from 15% in 1995.
The monthly survey provides a snapshot of the health of the energy-intensive manufacturing sector.
Absa economist Sello Sekele said the PMI had been choppy in recent months but the average for the first quarter of 2024 was equal to the final quarter of 2023.
“In the fourth quarter, the gross value added by the sector managed to eke out a 0.2% quarter-on-quarter expansion, with a more robust annual increase,” Sekele said. “The PMI generally suggests a similar experience is possible in the first quarter.”
A closer look at the index shows both the business activity and new sales orders indices declining in March from 48.6 to 44.5 and from 49.9 to 45.5, respectively.
Sekele said comments by respondents suggested demand conditions were sluggish. Manufacturers were also concerned about cost pressure continuing to build, with the purchasing price index up for a fourth consecutive month, reaching 74.6 in March from 72.2 previously.
“This is likely to a large extent [to have been] driven by increases in the fuel price. The index is now somewhat above its long-term average reading,” Sekele said.
The BER said a potentially more positive development was the steep decline in the supplier deliveries index from 62 to 54.1. This index is inverted, so faster deliveries result in a decline in the index.
“The reason for this being potentially positive news is that it could be one of the first signs that congestion at the local ports is easing somewhat, and deliveries of [imported] supplies are now coming through faster,” the BER said.
The research centre explained that this is because faster deliveries during times of uncongested and unconstrained supply chains are generally seen as a negative for the sector as it means suppliers are less busy due to lower demand from other clients, and thus goods are able to get to the respondent faster.
“This could have played some role in March given that demand for manufactured goods weakened, assuming so did demand by manufacturers for inputs. However, given respondents’ commentary over recent months and other anecdotal evidence, better-working supply chains are a more likely reason for the improvement in delivery times,” the BER said.
The centre said this could, over time, also lift inventories of intermediate goods and raw materials, which ticked down slightly in March.
Sekele said another positive development was the further improvement in sentiment towards business conditions. He said the index tracking expected business conditions in six months’ time rose to a solid 62.1 points in March from 59.5 in February, “its highest level since the start of 2023”.
“This is the most upbeat respondents have been about business conditions going forward since the start of 2023,” he said. “The increased optimism is likely underpinned by improving electricity supply and easing port congestions.”
The employment index rose to 54.4 from 49.2. Sekele said that while it was encouraging, BER cautioned against reading too much into sudden movements in an index.
“However, the employment index has been on a steady increase in recent months. This could bode well for job growth in the sector,” he said.
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