Despite the uptick in December, the average of 45.6 index points for Q4 2015 was 4.5 index points below the level recorded in Q3 2015, which suggests that after output staged a significant rebound in Q3, production growth came under renewed pressure in Q4, reports the Bureau for Economic Research.
Manufacturing production, as measured by statistics South Africa, declined by 1.7% and 1.2% (month-on-month, seasonally adjusted) in October and November respectively.
This means that barring a strong performance in December, which is unlikely given the sustained weakness in the PMI, the sector is likely to contract on a quarter-on-quarter basis in Q4 2015. Amid increasing drought conditions and continued pressure on the mining sector, this does not bode well for overall GDP growth.
Despite the weak headline figure, it was encouraging that all of the major subcomponents of the PMI increased in December, albeit slightly. Most notably, the index measuring suppliers’ performance rose back above 50 points for the first time since July 2015.
Business activity remained very weak as the index rose by only 1 point to 42.4 in December, likely owed to demand also remaining sluggish. The new sales orders index increased to only 44.8 index points from 43.5 in November.
Prospects for the sector remain subdued with the PMI leading indicator falling further below the 1-point level in December. This means that inventories outstripped demand, which does not bode well for production growth going forward.
Manufacturers also remain pessimistic about business conditions through the first half of 2016. The index measuring expected business conditions in six months’ time remained below 50 for a second straight month.
While the significantly weaker rand exchange rate may provide local exporters with some competiveness benefits in international markets, it also pushes up costs. As such, the PMI’s price index ticked up for a second straight month, placing pressure on selling price margins and overall profitability.
State of extreme distress – Standard Bank SA PMI
Meanwhile, South Africa’s private sector is in a state of extreme distress amid poor market conditions and a lack of demand, notes the Markit/Standard Bank SA headline PMI.
Companies reported a renewed decline in new business, following a stabilisation in November. New orders from foreign markets also decreased during the month.
About 400 private-sector executives at companies across various sectors were surveyed on current business conditions including new orders, employment and input prices.
As has been the case since September, employment numbers were marginally down in December.
"With business outstanding falling further and conditions in the sector showing no signs of immediate improvement, companies continued to cut jobs, although the rate of job shedding remained marginal overall," said Markit economist Oliver Kolodseike.
Input costs rose further in December. Companies continued to pass on higher costs to their clients, as highlighted by a rise in output prices.
Subdued demand remained one of the main reasons for companies to reduce their buying activity in December.
Lower input buying in turn contributed to a further reduction in pre-production inventories.
Some infomation for this article was adapted from Business Day