PMI_down_100.jpgThe Purchasing Managers’ Index (PMI) plunged in July, signalling that the output recovery in the manufacturing sector was set back notably at the start of Q3. From an elevated 57.4 in June, the headline PMI suffered a record single-month decline of almost 14 points. It dropped to 43.5 in July, which is well below the neutral 50 level.

The magnitude of the monthly decline, which dragged the PMI down to the lowest level since May 2020, was worse than during the hard lockdown in April 2020. At that stage, the SA manufacturing PMI and PMIs across the globe were (counterintuitively) propped up by a big increase in the supplier deliveries index.

July was a particularly challenging month, with the broader economy and the manufacturing sector hit by several supply-side and confidence shocks. These include a severe COVID-19 third wave, the associated harsher adjusted level 4 lockdown restrictions for a large part of the month, as well as the unprecedented looting/arson attacks in KwaZulu-Natal (KZN) and parts of Gauteng. The riots disrupted supply chains, industrial output and the demand for manufactured goods.

In addition, the manufacturing sector may also have been negatively impacted by the cyber-attack on Transnet, which saw operations at SA’s major ports temporarily grind to a halt. The July PMI reading suggests that these factors vastly outweighed the positive spillovers to parts of the manufacturing sector from robust SA mining sector activity amid elevated commodity prices.

The severe adverse impact of these events is best highlighted in the business activity and new sales orders indices of the PMI. Both indices declined dramatically in July.
The business activity index plunged by an unprecedented almost-30 index points during July. Excluding the trough in April 2020 during the height of SA’s hard COVID-19 lockdown, the index sank to an all-time low (the series has been measured since September 1999).

The riots, particularly in KZN, could be equated to the level 5 hard lockdown in April 2020, with even those firms not directly affected by the looting forced to close amid security concerns. One PMI respondent remarked that they effectively lost two weeks of output. Even after the violence abated, public transport remained an issue, starving firms of workers. Some workers also preferred to stay home until there was more certainty that the violence would not erupt again.

Albeit less so than in recent months, actual annual manufacturing production growth in July will still benefit from the low base of 2020. However, the July PMI forestalls a very poor month-on-month print for actual factory production. The move to adjusted level 3 lockdown restrictions should also be supportive, especially in manufacturing subsectors with strong links to the hospitality and liquor industries.

In the case of sales orders, excluding April 2020, one must go all the way back to early 2009 in the aftermath of the global financial crisis to find the index at the low reached in July. The index tanked by more than 25 points. Both the lockdown restrictions and the riots would have hurt orders for manufactured goods. Respondents also reported a loss of export sales. With SA’s key advanced country export markets still in recovery mode, this may reflect the impact of infrastructure closures/logistical bottlenecks owing to the unrest in KZN/Gauteng, as well as the Transnet IT security breach.

After a terrible July, the lifting of some of the level 4 restrictions and calm returning to KZN/Gauteng should lift factory output. This is in line with the projections of the PMI respondents: The index measuring expected business conditions in six months rose by 5 points to 64.3 in July.

After gaining some ground in June, the employment index declined below the key 50-point neutral mark in July. It is hard to say how much of this is because of the looting. A government survey amongst more than 1 000 businesses (mainly in KZN) showed that more than 10 000 jobs across different sectors were at risk because of the negative impact on business operations stemming from the violence. Irrespective of the driver, the key message is that the manufacturing sector is unlikely to be a source of any meaningful job growth in the foreseeable future.

The inventories index also saw a big decline in July. It was the first time since January 2021 that the index dropped below the 50 mark. The July level was substantially down from 2021Q2’s average of 56.4 when manufacturers seemed to be on a re-stocking drive.

After increasing notably in June, the supplier deliveries index rose further during July. The latest increase probably reflects the additional supply-side bottlenecks (on top of global constraints) caused by the looting-induced closure of key transport routes and ports in recent weeks. At a minimum, the high index level suggests that supply chains are not functioning optimally, resulting in products being less readily available and slowing down supplier delivery times. Bear in mind that this index is inverted, which means that longer delivery times lift the index. Ordinarily, in times of undisrupted supply chains, longer lead times are seen as a sign of increased demand for inputs from manufacturers.

The purchasing price index declined for a fourth consecutive month. Although the index remains elevated, the sustained decline bodes well for an imminent peak in actual producer price (PPI) inflation. According to Stats SA, the PPI for manufactured goods accelerated further to 7.7% y-o-y (highest since early 2016) in June. The June print is likely to be the peak in the current upward cycle. However, individual cost pressures will remain in the foreseeable future. One example of this is the further increase in the price of fuel in early August.