After an encouraging lift in July, the Absa manufacturing purchasing managers index (PMI) slid back into contractionary territory in August.
This was the fifth time in eight months that the reading edged into contractionary territory in 2024.
The PMI, a survey of purchasing managers in the manufacturing sector published by the Bureau for Economic Research (BER), assesses the business conditions in the sector and provides an important indicator of economic activity in the country.
The seasonally adjusted PMI decreased by 8.8 points to 43.6 in August, down from 52.4 in July.
“This reflects high volatility in the sector in a year of political uncertainty, high but slowing inflation, elevated borrowing costs and sluggish global and domestic demand, which has not been strong enough to fuel a sustained rebound in production,” BER chief economist Lisette IJssel de Schepper said.
Absa economists said the PMI data had been “exceptionally volatile” in recent months, making it difficult to “discern signal from noise in a single month’s release”.
“It is also worth noting that the PMI measures month-on-month changes and the August data only indicate a strong pullback from a relatively solid July,” they said.
The business activity index and new sales orders both showed decreases. The former decreased by 11.9 points to 38.9, while the latter plunged to 34.6 points, after surging by 17.5 points to 55.4 in July.
The BER said sales orders, previously on hold due to political uncertainty, that came through after the formation of the government of national unity (GNU) were probably behind the improvement in new sales orders in July.
“It is important to remember that the index measures month-on-month activity, so the downtick signals a decline relative to what seems to have been a strong July,” IJssel de Schepper said.
Declines in export and domestic demand contributed to the poor results for new sales orders.
Demand is taking longer to recover as consumers in SA still face tough conditions such as high interest rates and inflation, which has only recently started to show sustained moderation. But the BER said that lower inflation and a possible decline in the interest rate could support demand in the coming months.
On a more positive note, the purchasing price index (PPI) did not change significantly in the August survey, confirming market consensus and recent inflation data releases that inflation has peaked.
“The reading is the second lowest this year. Given stable oil prices and a relatively stronger currency, fuel prices decreased slightly at the beginning of August, with more significant cuts tipped for September,” the BER said.
Producer inflation has decreased markedly from 2023’s average of 6.7% and is forecast to average close to 4% in 2024, partly because of petrol and diesel price cuts.
“Fuel price cuts and a stronger exchange rate in the last few months have kept input costs relatively contained. Fuel price cuts of 4.5% month on month in September should further support purchasing prices, boding well for [producer] inflation for intermediate goods,” Absa said.
Data released by Stats SA last week showed that producer inflation slowed by 0.2% in July. Annual producer inflation for July was 4.2%
Stats SA will publish manufacturing output data for July next week. The June data release showed that manufacturing production performed below expectation, decreasing by 5.2% compared with the same month in 2023.
Seasonally adjusted manufacturing production was down 0.5% in June compared with May. Absa expects to see a 1.3% month-on-month rebound in production for July.
However, there were still signs of possible improvement later in the year. According to the BER, the index tracking expected business conditions in six months’ time to decrease to 61.3 points in August from 69.4 points in July.
“Despite the decline, it remains at a high level and signals an improvement in business conditions.”
Absa said continued stability in electricity supply and some demand recovery in the months ahead should be supportive of the manufacturing sector.
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