Managers in the manufacturing industry have remained optimistic that the current tough trading conditions will not persist in six months’ time, after conditions deteriorated further at the end of the third quarter.
The seasonally adjusted Absa Purchasing Managers’ Index (PMI) remained firmly in contractionary territory as it declined by 4.3 points in September to 45.4, down from 49.7 in August.
The PMI, compiled by the Bureau for Economic Research (BER) on behalf of Absa, could raise concerns about the prospects for GDP in the third quarter as the manufacturing sector is one of the two sectors that made a significant positive impact on economic growth in the second quarter.
The September reading indicated the eighth consecutive month of contraction in South Africa’s factory activity and the sharpest decline since July 2021.
Absa said the soft reading for the headline PMI was driven by weak demand and constrained production.
Absa economist Sello Sekele said in terms of demand, September saw an outsized decline of more than 10 index points in the new sales orders index, which fell back to a level last seen in mid-2021.
Sekele said external and domestic demand for South African manufactured goods seemed to have been under pressure, with the export index hit hard in September.
He said this most likely reflected the weakening growth momentum in key export markets for local manufacturers, as global demand conditions remain fragile, especially in the euro zone.
This comes as restrictive borrowing costs and perhaps also the sharp fuel price hikes at the start of September weighed on demand domestically.
“After eight successive months, the PMI has been signalling challenging business conditions in the manufacturing sector,” Sekele said.
“This month, in particular, the two most important indices in terms of dropping the PMI are the business activity index as well as the demand index.
“The demand index has actually fallen to the level that we saw in the July 2021 unrest.
“So that decline is mainly due to domestic factors, we think, including high interest rates, as well as rising oil prices that are affecting the demand domestically and internationally.
“We believe that it’s an indication that our key trading partners are probably facing economic challenges.”
Sekele said the business activity sub-index slipped 8.1 points to 41.9 in September, reversing most of August’s almost 12-point gain, as a result of more intense rolling power blackouts and weak domestic and external demand.
Compared to August, there was a step up in load shedding during September, and this may help to explain the low level of activity during the month, along with poor demand conditions.
“For the entire third quarter, the business activity index averaged 43.3, down from an average of 48.1 in the second quarter,” he said.
“The move lower would be consistent with a quarterly contraction in actual manufacturing output. If this materialises, it will weigh on overall GDP growth momentum in the third quarter.”
After losing ground in August, Absa said the employment index remained at a depressed level in September.
Based on the PMI employment index for July to September, the third quarter was poor in terms of job creation in the manufacturing sector.
“Indeed, South Africa’s poor growth outlook for this year is not conducive to a sustainable lift in employment,” said Investec economist Lara Hodes.
In spite of this, purchasing managers indicated that they did not expect the current tough trading conditions to persist, with the index measuring expected business conditions in six months rising to 55.6, the highest level since March.
BUSINESS REPORT