February PMI builds on January’s increase

The seasonally-adjusted Absa Purchasing Managers’ Index (PMI) increased to 53 index points in February 2021 from 50.9 in the previous month. The further increase (January 2021 was 0.6 points up from December 2020) was supported by three of the five sub-components gaining relative to January. Only the Employment Index moved lower, while the Supplier Deliveries Index also ticked down but remained well above the neutral 50-point mark and thus supported the headline figure.

The most encouraging outcome of the February survey was a continued improvement in new sales orders. Following a rise in January, the index rose further to 54 index points, which is the best level since October 2020. The improvement was supported by better export sales relative to the previous month, while the loosening of local lockdown restrictions likely also contributed to an uptick in domestic demand.

The improvement in orders supported an increase in the Business Activity Index. Following four consecutive declines, the index rose by a sizeable 8.6 points in February. The increase suggests that production growth re-accelerated after losing steam towards the end of last year.

The Inventories Index almost fully regained January’s losses and rose back above the neutral 50-point mark in February.

Following a somewhat surprising uptick in the previous month (as activity deteriorated in January), the Employment Index declined in February. The average for the first two months of 2021 is in line with the 2020 Quarter 4 reading. In Quarter 4, the factory sector managed to add 28 000 formal jobs on a quarterly basis, although employment was still down by a sizeable 171 000 jobs from the year prior.

Following a sharp increase in January, the Supplier Deliveries Index declined by more than 7 points to its lowest level since mid-2020. Although the index remains high compared to its long-term history, the sizeable downward move suggests some improvement in supply chain workings. This is because this sub-component is inverted. If goods are less readily available and purchasing performance worsens, this is normally a sign of increased demand for manufactured products and actually lifts the index. However, other factors, such as lockdowns and production stoppages in the domestic economy or in trading partners, can also distort the supply chain and inadvertently lift the index.

Purchasing managers remain relatively optimistic about the six-month outlook, with the Expectations Index unchanged at 59.2. A factor which may quell sentiment going forward could be continued upward pressure on costs, especially if the demand environment remains relatively weak and producers cannot pass these costs on to mitigate some pressure on profitability. Indeed, the Purchasing Price Index ticked up further after reaching a more than two-year high in January. A hefty fuel price increase at the start of the month likely contributed to the acceleration in cost pressure. Fuel prices are expected to rise further in the coming months on the back of a higher Brent crude oil price as well as an increase in fuel levies. A double-digit hike in electricity tariffs will also push up costs.

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