Manufacturing activity in South Africa is expected to remain under pressure in the months ahead after sliding further into contractionary territory in June, in spite of less intense daytime load shedding during the month.
Manufacturing is an important part of South Africa's economy, contributing 8% of gross domestic product (GDP), 12% to formal sector employment and at least 40% of the rand value of exports.
The seasonally adjusted Absa headline Purchasing Managers’ Index (PMI) dropped further below the neutral 50-point level in June, declined by 1.6 index points to 47.6 points from 49.2 points in May.
The June PMI reading marked the fifth consecutive month of contraction in manufacturing activity and was the lowest level since mid-2021, as business conditions deteriorated further.
Absa senior economist Miyelani Maluleke all five subcomponents used to calculate the headline PMI were below the neutral 50-point level for the first time since 2018, pointing to a worsening of business conditions in the sector.
“A key drag on the sector seems to come from weak demand, with the new sales orders index edging down once again as the decline in export sales deepened and domestic demand remains under pressure,” Maluleke said.
“However, the survey signalled that business conditions will improve by the end of the year.”
Although the business activity index remained below the neutral 50-point mark for a fifth consecutive month in June, it improved to its best level since January.
The index rose from 47.7 to 48.9 points in June, likely on the back of significantly less load shedding during the month, with weak demand conditions thwarting a bigger recovery.
The level of the business activity index is thought to suggest that momentum in official production data remained very subdued in the second quarter.
“Indeed, while the electricity supply situation has improved relative to expectations during the high demand winter period, it still continues to impede optimal economic performance,” said Investec economist, Lara Hodes.
“Moreover, subdued demand, with both business and consumer confidence falling further into depressed territory in the second quarter of 2023 continues to suppress activity.”
There was also somewhat better news on the cost front, as the purchasing price index declined to the lowest level since the start of the year.
The index declined from 77 to 71.3 points as a stronger rand exchange rate and a drop in the fuel price at the start of the month likely contributed to the moderation in cost pressures.
Another notable development in the June survey was the turnaround in forward-looking sentiment. The index tracking expected business conditions in six months’ time rose from an extremely depressed 43.7 to 52.4 points in June.
Though the current level remained well below the long-term average, it at least signalled that purchasing managers expected conditions to look better by the end of the year instead of worse.
However, the new sales orders index lost some of May’s gains and fell back to 45.6 points in June as respondents reported a worsening in export sales.
The decline in the new sales orders index was underpinned by the weak domestic demand environment and subdued export activity, while domestic demand was likely also under pressure amid rising borrowing costs, sticky inflation and other headwinds.
The employment index also picked up moderately in June but remained subdued at 47.9 points as South Africa’s poor growth outlook for this year of just 0.2% GDP is not conducive to a sustainable lift in employment.
Oxford Economics Africa head of macro Jacques Nel said the country’s economy was facing serious challenges even when electricity constraints were improving.
“Forward-looking factory data suggests continued strain within South Africa’s economy,” Nel said.
“The latest survey data points towards weakening domestic demand with softer new sales orders and a broad-based contraction of the PMI subcomponents.”