Cape Town - Absa's seasonally adjusted Purchasing Managers’ Index (PMI) fell sharply to below the 50 point mark last month dragged down by some key indices having slumped to multi-year lows in the period, it said on Wednesday.
“This was the first full survey after the recent cabinet reshuffle and subsequent sovereign credit rating downgrades. It is likely that respondents now anticipate economic growth and domestic demand to be weaker than before. As such, they have likely scaled back expectations for orders and activity growth going forward,” Absa said.
The Absa PMI dropped to 44.7 index points, from an average of 51.9 points during the first quarter of the year. An index score above 50points indicates an expanding manufacturing sector, while anything below that is seen as entering contraction territory. The decline was relatively broad based, with key subcomponents measuring business activity and inventories slumping to multi-year lows, said Absa.
The Business Activity Index tanked from 53.5 points in March to just 37 points last month. Absa said that this was the indices’ second biggest decline on record.
“The current level of 37 points is the lowest since 2009, albeit only just so. During the last few years, the index has only dropped to close to its current weak level for a single month before rebounding in subsequent months,” Absa said.
The new sales orders index plunged by 8.3 points to 44points - its lowest since August last year. Absa attributed this to weak domestic demand as respondents to its survey were still seeing growth in export orders.
The employment index showed resilience after in recorded at 50.3 points, a moderate decline from the 50.9 points recorded in March. However, Absa warned that should weaknesses in output and demand persist in the coming months, South Africa would likely see the employment deteriorate to going forward.
Ian Cruickshanks, chief economist at SA Institute of Race Relations, said the figures, if they did not improve in the coming months, would lead to the manufacturing sector entering recession, which would harm the auxiliary sectors.
“This was a general pull-back in the manufacturing sector and this means we would see deterioration in the gross domestic product data of the second quarter. What is worrying is that this would have an impact on fixed investment in the sector, which would harm economic growth further,” Cruickshanks said.
Absa said that the fact that key sub components of business activity and inventories had slumped to multi-year lows was indicative that the manufacturing sector had experienced a rough start to the second quarter of the year.
Read also: Absa PMI declines sharply in April
The purchasing price index rose by 6.4 points in April, driven by a weaker rand exchange rate and a higher Brent crude oil price during the month. The purchasing commitments index slumped by 14.7 points to 35.9 points in April - its second biggest slump on record.
The inventories index fell by 10.7 points to 41.3 points last month, which Absa said was the index’s lowest level since 2009.
John Ashbourne, Africa economist at Capital Economics, said the poor data indicated that the sacking of former finance minister Pravin Gordhan dealt a serious blow to confidence and that the other business confidence figures released later this week would provide a clearer sense of the damage. “While we had expected that the economic impact of the political situation would take time to manifest, the measure of current business activity fell sharply. This suggests that activity in the manufacturing sector may already be suffering,” Ashbourne said.
He added that, while Tuesday's PMI reading was far from being conclusive, it provided an early indication of economic trouble ahead. “Things will become clearer when business confidence figures are released over the coming days. We’ve highlighted the South African Chamber of Commerce and Industry’s April business confidence index as a key gauge of whether the latest political turbulence will have a lasting economic effect.”