Poor prospects for production recovery as business activity slows
JOHANNESBURG – Business activity in the manufacturing sector in South Africa slowed in November as demand and new sales orders remained under pressure.
The Absa Purchasing Managers’ Index (PMI), released yesterday, ticked down to 47.7 index points from 48.1 points in October.
Absa said the slowdown was a sign of poor prospects for a recovery in production in the fourth quarter as the PMI remained below the neutral 50-point mark that separates contraction from expansion.
“The weak readings on the business activity index seen in the fourth quarter so far argue against a strong, if any, recovery in manufacturing output,” Absa said.
“Demand remained under pressure with the new sales orders index not being able to hold on to all of last month’s gains.
"Respondents saw a decline in export demand during the month.”
The PMI sets the tone for how manufacturers view the month ahead, and it is a good barometer of the health of the manufacturing sector.
Absa said the decline was broad-based as four of the five sub-components of the headline PMI nudged down when compared with the previous month.
Absa said the business activity sub-index performed the worst, declining to 39.4 points in November from 45.6 points in October.
It said respondents also recorded an ease in export demand during the period, with purchasing inventories being the only major subcomponent to record an improvement compared to the previous month.
Investec economist Kamilla Kaplan said the mood remained sombre, although the expected business conditions in six months’ time sub-index increased slightly.
“This does not bode well for employment levels in the manufacturing sector,” Kaplan said.
“Indeed, job losses, as well as a reduction in purchasing activity, were sustained in November amid low production requirements.”
Despite the decline, the average level of the PMI in October and November was still slightly above that recorded in the third quarter.
But Absa said the reading meant that conditions were still expected to worsen in six months’ time, albeit less so than before.
The Steel and Engineering Industries Federation of Southern Africa (Seifsa) said that the PMI data captured a difficult year for local businesses in the broader manufacturing sector.
Seifsa economist Marique Kruger said that weak business activity, low margins and profit levels, including increasing costs, were disconcerting, and do not bode well for medium- to long-term planning.
“The data is also reflective of prevailing perception among business executives of the low possibility of a turnaround in fortunes as we approach the year-end,” Kruger said.
“The challenging environment, therefore, highlights the need to urgently assist local companies in directly reducing the prices of intermediate inputs, towards enhanced competitiveness.
“Should the government fail to generate sufficient savings to achieve a primary balance surplus in the medium term, a downgrade to junk by Moody’s becomes probable in 2020.