SA manufacturers remain challenged

File photo: AFP

File photo: AFP

Published Aug 3, 2015

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Johannesburg - The latest Purchasing Managers Index paints an encouraging start to the third quarter of the year, but shows there are several weak spots in the economy that will present a challenging short-term ahead.

The Barclays Africa and Bureau for Economic Research PMI is seen as an important indicator of economic trends. The index, which has been adjusted for seasonality, came in flat in July at 51.4 points.

This follows a strong gain in May - off very depressed levels - and a further rise in June.

Barclays Africa economist Miyelani Maluleke says, on the surface this is not a great figure, but it is positive considering the challenges the sector has been facing in terms of the economic environment and electricity shortages.

The index also notes business activity and inventories are higher, which is positive. Maluleke says business activity, at 53.2 index points, is now at its highest level since the start of January.

Of the key PMI subcomponents, the inventories index recorded the biggest gain in July. The index rose by 3.4 points to 60.2.

Maluleke notes, the high levels of inventory either indicate manufacturers were more optimistic than they should have been, or are expecting demand to improve later in the year.

However, Maluleke says it is not likely there will be a big improvement in demand and he is concerned over manufacturers’ sense of optimism. He says general economic conditions and business confidence - which fell to levels last seen in during the first half of 2014 during the second quarter of this year - will weigh on demand.

Cost pressures

In addition, the pricing index remained high in July and, although it showed a slight easing, this indicates that manufacturers continue to face elevated pricing, says Maluleke. He says they will have to step carefully when it comes to costs.

The PMI price index declined by 2.1 points to 75, which could already reflect the impact of lower commodity prices, including the renewed decline in the Brent crude oil price.

Local demand is also weak, with the new sales orders index dropping by 1.9 index points and falling back below the 50 threshold. Barclays Africa says this may provide further evidence of the general demand weakness in the domestic economy. The employment index remained stuck well below the 50 level, losing almost 2 points to 46.9.

Surprisingly, purchasing managers remained optimistic about the future, says Barclays Africa. The index measuring expected business conditions in six months gained 1.2 points to 63.2. It could be that the sustained weakening trend of the rand exchange rate and improved news flow on the Greek debt crisis buoyed sentiment.

Yet, Maluleke notes the growth indicators are poor, and point to a deteriorating outlook for the manufacturing sector. As an example, he cites very weak commodity prices, with both gold and platinum having fallen to lows last seen several years ago, and the ongoing electricity crunch.

One big positive is the sustained weak oil price, which has been falling in recent weeks as there is a glut in supply, says Maluleke. However, the weaker rand will push up the cost of imported material, he adds. The weaker currency could, however, spur exports, he notes.

All of these indicators point to a challenging outlook, despite the encouraging start to the quarter, for manufacturers, says Maluleke.

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