The seasonally-adjusted Absa Purchasing Managers’ Index (PMI) ended 2018 on a positive note, reaching its best level of the year. The PMI rose from 49.5 in November to 50.7 in December, which is just above the neutral 50-point mark and signals growth in the sector.
The headline PMI was well supported by three of the five sub-components: activity, demand and supplier performance. However, employment moved lower, while the Inventories Index edged back below the neutral 50-point mark, noted the Bureau for Economic Research (BER) in its January report.
The New Sales Orders Index rose for a second month to reach 54.3 points in December. Respondents noted a further rise in export orders, which likely supported the overall improvement in demand. A deceleration in global growth, as suggested by the recent downturn in many of the international PMI indicators, may start to weigh on export growth going forward.
Nonetheless, in December, the improvement in demand helped to lift the Business Activity Index for a fourth consecutive month above the 50-point mark for the first time since February 2018. The index rose to 53.8 index points.
Indeed, both new sales orders and activity came in at the highest level seen in 2018.
Unfortunately, despite an uptick in activity, the Employment Index slumped to 40.5 points, the lowest level since 2014.
On a positive note, for the first time since July 2018, respondents expect business conditions to improve in the following six months. The index tracking expectations rose for a second month to reach 51.4 in December and is now almost 10 points above a low of 41.7, reached in October 2018.
The positive sentiment is supported by the PMI’s leading indicator, which rose further above one with sales orders outstripping inventories. A further decline in the Purchasing Price Index likely also lifted spirits, as it reflects a decline in cost pressures for manufacturers.
The Inventories Index edged lower after a solid improvement in November. The index dipped back below the neutral 50-point mark to 48.5 in December. Despite the decline, the index remains about 7 points above October 2018’s level.
The Purchasing Price Index declined for a third consecutive month to reach its lowest level since May 2018. This was despite a weaker Rand exchange rate during December (compared with November), which pushes up the cost of imports in Rand terms. However, this was likely outweighed by the sharp fuel price decline at the start of December. A lower Brent crude price (on average) during December led to a further fuel price drop at the beginning of January. This may drive a further decline in the Purchasing Price Index in January.
The possible return of electricity loadshedding from mid-January could depress the tentative signs of a recovery in the sector. Indeed, while the December survey results are encouraging, a sustained recovery in demand is required before a meaningful recovery in manufacturing output, investment and employment can take place.