SOUTH African manufacturers are expecting business conditions to improve over the next 12 months after confidence reached the best level in two years in the second quarter, though it remains in contractionary territory.
The Absa Manufacturing Survey for the second quarter released yesterday showed that business confidence rose seven points to 28 during the quarter, highlighting improved sentiment amid load shedding relief.
The quarterly survey, which covers about 700 businesspeople in the manufacturing sector, was conducted by the Bureau for Economic Research (BER) at Stellenbosch University between May 9 and 27.
“Over the last few years, manufacturers’ confidence levels have been broadly correlated to the intensity of load shedding,” said Justin Schmidt, executive for manufacturing sector at Absa Relationship Banking.
“Although business conditions remain tough, the suspension of load shedding has been the main factor supporting improved sentiment this quarter.”
This bodes well for economic growth in the second quarter after manufacturing was one of three sectors that drove much of the downward momentum on the production side of the economy as real gross domestic product (GDP) contracted by a marginal 0.1% in the first quarter.
The Absa survey also corresponds with Statistics South Africa (Stats SA) data and S&P Global South Africa Purchasing Managers’ Index (PMI), which showed a significant uptick in manufacturing activity at the beginning of the second quarter.
Data from Stats SA released this week showed that manufacturing production rose sharply by 5.3% year-on-year in April following an upwardly revised 6.5% slump in March.
The S&P Global PMI last week picked up to 50.4 in May 2024 from 50.3 in April, indicating the second straight month of a slight improvement in the country’s private sector, driven by capacity-building efforts.
Notably, Absa said yesterday that capacity utilisation improved by 11 points to the best level seen since the last quarter of 2021, indicative of less slack capacity in the sector.
Relative to planned production and expected demand, both current raw material and finished good stocks returned to positive terrain, increasing 17 and 16 points respectively, reaching the highest levels recorded since 2022 and 2020.
Additionally, a nine-point increase in seasonally adjusted production bodes well for output during the quarter relative to the contraction posted in the first quarter.
Indeed, both raw material shortages and insufficient demand are considered less constraining to current activities (down 14 and five points respectively).
After five consecutive quarters of very negative readings, Schmidt said manufacturers were also more upbeat about fixed investment (which increased by 12 points).
“Given energy constraints, manufacturers have focused their recent efforts on staying operational by investing in renewable energy or generators – perhaps now we will start seeing investment in capacity building,” Schmidt said.
Manufacturers further indicated a significant improvement (up 21 points) in their intentions to invest in machinery and equipment over the next 12 months.
Taking a forward-looking view, more manufacturers are expecting business conditions to improve over the next 12 months (up 20 points) with an increase in both import and export volumes expected (up seven and six points respectively).
“While improved sentiment is an encouraging development, competition from cheaper imports, rand volatility, muted consumer demand and port-related issues remain concerns,” Schmidt said.
“The recent storms in KwaZulu-Natal could also result in downside risk.”
BUSINESS REPORT