Economic activity in SA’s manufacturing sector lifted in April, an early indication that the economy got off to a good start in the second quarter of 2024.
However, as the likelihood of interest rate cuts during the latter part of the year has become more uncertain and the threat of load-shedding during winter remains, expectations of sustained improvement remains muted.
The Absa purchasing managers’ index (PMI), which is published by the Bureau for Economic Research (BER), improved by 4.8 points to 54 in April, moving back into expansionary terrain. This followed a dip below the neutral 50-point in March.
This reading for April was above the Bloomberg consensus forecast, which had the index recovering only modestly from 49.2 points in March to 50.5.
The PMI, a survey of purchasing managers in the manufacturing sector, assesses the business conditions in the sector and provides an important indicator of economic activity in the country.
The rebound in April was likely to be the result of a full month of no load-shedding, said economists at the BER.
“In all, the survey results reflect a good start to the second quarter of 2024,” the BER said.
Uninterrupted power supply also supported business conditions in the factory sector, with the business activity index improving to 57.2 points from 44.5 in March, and new sales orders rising to 55.6 points in April compared to 45.5 in March.
Eskom has attributed the load-shedding-free period, now going into a sixth week, to improvements in the performance of its coal-fired generation fleet, as well as lower demand for power due to a surge in 2023 in private solar power generation and overall weak economic growth.
During a recent presentation of Eskom’s load-shedding outlook for April to August CEO Dan Marokane said the improvement in generation performance enabled them to adjust the expected capacity that will be unavailable due to breakdowns in their best-case scenario by 1,000MW (from 15,000MW in 2023 to 14,000MW in 2024).
Eskom’s performance data for April shows that utilisation of its diesel-powered emergency generation fleet dropped by more than half this April compared to the same month in 2023. In addition, breakdowns had reached their lowest point since December and the system achieved its best performance since June 2023.
Eskom warned, however, that there was likely to be more load-shedding in the coming months — albeit less frequently and at lower stages than last winter. The most likely scenario was that breakdowns would be maintained below 15,500MW. This would result in a maximum of 50 days of load-shedding between April and August at a maximum level of stage 2.
The expectation of more load-shedding in the coming months weighed on the PMI’s index for expected business conditions over the next six months. According to the BER, this index declined to 55.7 in April from 62.1 in March.
“The expectation of a return of load-shedding, relative to no disruptions currently, could explain this. There might also be concerns about fewer interest rate cuts in SA and elsewhere compared to earlier expectations,” BER economists said.
The SA Reserve Bank’s April monetary policy review indicated that lingering uncertainty about when inflation (now at 5.3%) would return to its target midpoint of 4.5%, and uncertainty about global disinflation, contributed to recent market expectations that SA’s policy rate in 2024 might remain unchanged or near its 14-year high of 8.25%.
Apart from expectations that interest rates would remain “high for longer”, uncertainty about SA’s general election later in May might also explain the drop in sentiment, said Oxford Economics Africa senior economist Jee-A van der Linde.
“We do not foresee any meaningful improvement for the SA economy in the near term as structural constraints, together with a high-cost environment, weigh on growth prospects,” he said.
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