Johannesburg - Manufacturing output growth is likely to remain suppressed in the fourth quarter, following a contraction in the third quarter, according to the latest Barclays Purchasing Managers’ Index (PMI).
The November PMI reversed losses in October and rose by 2.4 points to 48.3.
Despite the uptick, this was the fourth consecutive month that the index stayed below the neutral 50-point mark, suggesting that factory sector output growth remained under pressure.
Barclays South Africa said in the absence of the official data for the third quarter, the PMI suggested output was likely to stay subdued after a 1.3 percent quarter-on-quarter contraction in manufacturing output in the third quarter.
This is consistent with the Absa/BER manufacturing confidence survey for the third quarter, which identified insufficient demand as a constraining factor.
The survey found manufacturing business confidence remained low despite an improvement in the third quarter.
It said manufacturing business confidence improved to reach 30 points in the third quarter, up from 23 in the second quarter.
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Kamilla Kaplan, an economist at Investec, said of the November PMI: “Domestic demand has remained persistently weak while global trade momentum is expected to increase at the slowest rate this year since the 2008/09 global financial crisis.”
She said lacklustre growth rates had restricted South Africa’s manufactured goods exports, despite currency depreciation.
“Statistics SA has assessed that 'for total manufacturing production as a whole, it seems that the rand weakness since 2011 has not provided the stimulus to manufacturing that many may have hoped for',” she said.
Barclays said two of the key subcomponents of the headline PMI showed an encouraging improvement last month.
It said most notable was the 6.9-point rise in the new sales orders index to 51.4 points.
“Higher export orders likely drove this improvement with local (consumer) demand remaining under pressure. Increased orders helped lift the business activity to 48.9 index points in November, up from 43.5 in October.”
The bank said despite the improvement, the business activity index had now been below 50 for five consecutive months.
NKC African Economics analyst Elize Kruger said the manufacturing sector accounted for 12.6 percent of South Africa’s gross domestic product (GDP) in the second quarter and prospects for the sector could have a material impact on economic growth and employment in the short to medium term.
“Already a sizeable contraction in manufacturing growth is likely to cap South Africa’s growth rate in the second quarter and with two months’ PMI readings now known, the likelihood that the manufacturing sector could enter a technical recession again has come to the fore,” she said.
Kruger said factors that were negatively impacting on the sector included, among others, low confidence levels, dismal local demand, hesitant global demand conditions as well as political and policy uncertainty.
Kaplan said based on the PMI survey for October, manufacturing sector conditions deteriorated further at the start of the fourth quarter.
“Subdued activity on the production side of the economy coupled with particularly weak household consumption demand and falling rates of private sector investment should see the economy achieve GDP growth of just 0.3 percent year on year in 2016.”