March PMI improves, but quarterly performance weakest since 2009

During Quarter 1 of 2020, the seasonally-adjusted Absa Purchasing Managers’ Index (PMI) experienced its weakest quarterly performance since 2009. The PMI averaged at 45.9 index points, compared with 47.6 in Quarter 4 of 2019.

The weak quarterly outcome was despite the PMI improving to 48.1 index points in March 2020, from 44.3 index points in February. Nonetheless, the PMI still remained in contractionary terrain for the 14th consecutive month.

The PMI was, to some extent, lifted by the Supplier Deliveries sub-index moving higher in March, reflecting slower delivery times. Under normal circumstances, a slowdown in supplier deliveries is seen as positive for the sector, as it suggests that suppliers are busier. However, in this case, the slowdown in delivery times is caused by global supply chain disruptions.

This phenomenon is observed in PMIs worldwide, but amplified in the South African manufacturing PMI, as this component carries a bigger weighting (the sub-index brings much-needed stability to the headline PMI and results in a better correlation with official manufacturing output figures in normal times).

Without the inadvertent boost from supplier deliveries, the headline PMI would have turned out lower in March. With this in mind, it is better to look at the PMI sub-components to understand the current underlying conditions in the factory sector.

Indeed, the Business Activity and New Sales Orders Indices hovered around 11-year-low levels in March. The nationwide lockdown imposed towards the end of March meant that most factories lost three working days compared to a ‘normal’ March.

Supply chain disruptions mean that production is also not expected to return to full capacity immediately after the lockdown is lifted. Combined with the extended lockdown, April factory figures will likely show a deep contraction. The extension is likely to result in some factories having to close permanently. This will have a sustained negative impact on production and could also result in further job losses in the sector. This will push the Employment Index, that is already close to a 6-year low, into further job losses.

It is no surprise then that respondents turned very pessimistic about expected business conditions going forward. The index tracking expected business conditions in 6 months’ time fell to 29.1 index points in March. This is below the lowest reading recorded during the 2008/2009 recession and is, in fact, the lowest level on record (since 1999). This means that respondents anticipate that the worst is yet to come for the manufacturing sector.

The Inventories Index remained very low and ticked up by a marginal 0.2 index points in March.

The Purchasing Price Index ticked up and rose to a 6-month high in March. The main driver was likely the significant weakening of the Rand exchange rate during the month. A weaker Rand results in an increase in the Rand-cost of imports of intermediate goods and raw materials. The significant decline in the Brent Crude oil price meant that the diesel price fell sharply at the beginning of April, which will have alleviated some pressure on costs during April.