South Africa’s manufacturing sector remained in the contractionary territory at the beginning of the second quarter of 2023, in spite of slightly easing from an eight-month low in April.
The seasonally adjusted Absa Purchasing Managers’ Index (PMI), released yesterday, rose to 49.8 points in April, from an eight-month low of 48.1 points in March.
The latest reading pointed to the third consecutive month of contraction in the country’s manufacturing activity, though the softest in the sequence.
Despite the improvement, the index failed to edge back above the neutral 50-point mark, which separates contraction from expansion, as business activity and new sales orders worsened relative to March.
The business activity index had a poor start to the second quarter of 2023, edging lower in April to 47.6 index points, which was more or less in line with the fourth quarter of 2022 average when the sector contracted and deducted from economic growth.
Respondents once again referred to load shedding hurting production but sustained weaker orders likely also weighed on output.
Absa said the underlying survey results suggest that the sector experienced another tough month at the start of the second quarter amid intense load shedding hurting output, and demand remaining under pressure.
Absa senior economist Miyelani Maluleke said the headline PMI would have deteriorated further if not for a significant improvement in the inventories index.
The inventories index surged to its highest level since mid-2022 in April.
“While we would caution against reading too much into a single month’s movement, the rapid rise in stock levels of materials and goods used in the production process could have been caused by improved deliveries of goods on the back of better working supply chains.
“In addition, or perhaps alternatively, weaker demand for final goods or disruptions to the production process (due to load shedding) could also have resulted in inventories of input products being higher.”
On the demand front, new sales orders moved down more decidedly than output and reached the worst level since September 2022, with the index declining to 44.3 from 48.5 in March.
The employment index stayed unchanged at 45.4 in April, with Absa saying a marked improvement in staffing levels was unlikely without a sustained rise in production and demand.
Investec economist Lara Hodes said employment would continue to remain subdued as the government failed to ignite economic growth due to the energy crisis.
According to Statistics South Africa, electricity generation was down 8.8% year-on-year to date.
“While the government has announced various initiatives to increase job creation in the country, South Africa's dire short-term growth outlook is not conducive to a sustainable lift in employment,” Hodes said.
Looking forward, Absa said that purchasing managers now only see a marginal improvement in future business conditions, with the index tracking expected business conditions in six months’ time declining from 55.5 in March to 51 index points in April.
Maluleke said the expectation of a harsh winter ahead regarding load shedding and uncertainty about the strength of global demand, with the manufacturing sector in major European trading partners under pressure, had likely depressed expectations.
“A potential positive for the sector is that reduced pressure on costs can be expected through the remainder of the year. Following a sharp rise in February, the purchasing price index moved lower for a second month in April,” he said.
“To be sure, input prices are unlikely to come down, but the rapid pace of annual cost increases producers had to deal with through 2022 is set to become much less intense through the rest of 2023. The notable exception is set to be load shedding mitigation costs, such as powering diesel generators.”