Johannesburg - A lower Purchasing Manufacturing Index in August - released on Tuesday by Barclays - is pointing to underlying weaknesses in the manufacturing sector.
Manufacturing, which accounts for about 17 percent of South Africa’s Gross Domestic Product (GDP), declined 6.3 percent in value in the second quarter of the year.
This decline helped push South Africa’s economy into negative territory, as GDP contracted by 1.3 percent.
As a result of the economic slowdown, fears are rising that the country will head into a recession. A recession occurs when there are two or more successive quarters of contraction in economic growth.
Now, the latest PMI figures seem to be pointing to increased woes in the manufacturing sector.
The Barclays Africa and Bureau for Economic Research PMI is seen as an important indicator of economic trends.
However, Barclays Africa economist Miyelani Maluleke does not believe there will be a recession. He points out there are other sector within the economy than mining, manufacturing and agriculture - all of which declined last quarter - that are resilient.
“As long as these [sectors] stay resilient, it is highly unlikely we will see a recession.”
Yet, the chances of manufacturing bouncing back any time soon have been dampened, says Maluleke.
“Any hopes of a strong rebound during the third quarter are, if anything, a bit dampened.”
The seasonally adjusted Barclays PMI fell by 2.5 index points to 48.9 in August 2015.
The dip below the neutral 50-point mark suggests actual manufacturing production is likely to have contracted in August. The average PMI for the first two months of the third quarter is only just above 50 points, which suggests that manufacturing output remains under pressure after contracting in the second quarter.
Barring the new sales orders index, all of the PMI’s major subcomponents deteriorated compared to July.
The inventories index registered the biggest decline and fell by 9.3 index points to 50.9 from a robust 60.2 in July. Last month, the level of high inventories pointed to a level of optimism within Manufacturing.
Maluleke notes the latest figures shows the headlines around the ongoing issues in China have also affected domestic sentiment, and manufacturers are feeling less optimistic than a month ago.
He adds there has been ongoing concern over the past few weeks over growth in China slowing down more than expected, but adds “we’re not alone here” as the slowdown has affected major markets.
The business activity index also dropped, declining to 48.6 points, the lowest level since April this year. In line with the contraction in activity growth in August, the employment index slumped to 45.2 index points – the index has now remained below the neutral 50-point mark for 17 straight months.
The only index to improve in August was the new sales orders index. The index edged back above the neutral 50-point mark to 50.6 index points from 49.8 in July.
A notable development in the August PMI was the sharp drop in the index measuring expected business conditions in six months’ time.
Maluleke says this was the steepest fall in the index since November 2008 and this measure is now at its weakest since 2013, a clear indication manufacturers are less confident and do not anticipate a strong rebound.
The index declined to 52.5 index points from 63.2 previously – purchasing managers had remained surprisingly upbeat about the future since December 2014.
This was despite an intensification of load-shedding and persistent weak demand conditions. Heightened concerns about the slowdown of the Chinese economy causes downward pressure on international commodity prices.
However, with lower prices weighing on the local mining sector with potential adverse spillovers to manufacturing, sentiment in August may have come off.
In addition, despite the increase in sales orders and the fall in inventories, the PMI leading indicator remained below 1. This generally does not bode well for actual production growth going forward, notes Barclays.
Barclays has adjusted its growth forecast for the economy down to 1.5 percent for the full year, dropping the measure from the 1.8 percent it previously anticipated. National Treasury had expected growth of 2 percent during February’s budget.
IOL