Manufacturing activity in South Africa plunged to a four-month low in May as sentiment returned to contractionary territory, in spite of another month of no load shedding.
The seasonally adjusted Absa Purchasing Managers’ Index (PMI) released yesterday, fell below 50 points in May, dropping significantly to 43.8 from 54 in April, the lowest reading in four months.
This decline signalled a renewed deterioration in the country’s manufacturing sector, primarily driven by a significant drop in demand, and uncertainties related to last week’s general election.
The PMI, which is conducted by the Bureau for Economic Research (BER) and sponsored by Absa, showed the manufacturing’s weakness was broad-based.
The business activity index declined to 38.1 points in May from 57.2 points in April, the second lowest reading in almost three years, on the back of the tight monetary policy stance.
New sales orders declined to 37.8 points in May from 55.6 points in April.
BER chief economist, Lisette IJssel de Schepper, said numerous respondents had indicated that orders were put on hold as clients awaited the election results, “The PMI has been in contractionary territory for three out of five months this year, as the manufacturing sector seems volatile in an election year.
“Amid sustained high interest rates and low credit extension, domestic demand remains sluggish. Respondents state that orders are drying up as consumers seem to be focusing on necessities.”
Port issues remained a concern for most local manufacturers, although there was an improvement in supplier deliveries, suggesting that the situation was improving.
The supplier deliveries index declined from 57.4 in April to 55.4 in May, due to low demand as there were fewer orders for suppliers to meet.
The few positives from the PMI were that the purchasing price index continued its trend of falling back, while businesses surveyed were even more optimistic regarding future business conditions.
The purchasing price index declined to 66.9 in May from 72.4 points in April, the lowest reading in six months and a second consecutive month of decline in input prices, reflecting easing cost pressure.
Oil prices have remained relatively low due to sluggish demand in the global markets, which supports the manufacturing industry, while the stronger rand exchange rate through most of the month likely also contributed to softer cost increases.
The index for expected business conditions in six months’ time increased to 57.6 in May from 55.7 in April as respondents likely hoped for a favourable election outcome, and a return of “put-on-hold” orders.
David Omojomolo, Africa economist at Capital Economics, however said the May PMI print was particularly disappointing given that April’s reading had initially raised hopes the economy was turning a corner.
Omojomolo said while conditions were expected to improve as the electricity situation continued to stabilise, the Absa PMI underlined the fragile state of the economy and the challenge that the next government faced to boost growth.
“For now, though, taken together with the recent dismal activity indicators, the PMI suggests that South Africa’s economy is entering the second quarter with similar weakness. We have long cited better electricity conditions as a key factor that will support an eventual pick-up in growth,” Omojomolo said.
“We still believe this to be the case, although the recovery may prove to be even more sluggish than anticipated, especially with no rate cuts from the SA Reserve Bank expected this year. A possible ANC-DA coalition could also see a further step up in fiscal consolidation measures.”
BUSINESS REPORT