PMI improves, but manufacturing conditions remain tough

The seasonally adjusted Kagiso Purchasing Managers’ Index (PMI) increased by 1.2 points to 51.6 in June. The index has now been above the key 50-point mark for three consecutive months.

There was a modest improvement across all the major sub-indices, except the employment sub-index, which continued to decline, said Abdul Davids, Head of Research at Kagiso Asset Management.

The business activity index regained all of May’s losses to reach 52.2 points in June. However, Davids points out that while the improvement is positive, the level of the index suggests that production remains under pressure.

The new sales orders index increased notably by 2.9 points to 54.0 in June, indicating that demand for manufactured goods improved somewhat.

Davids noted that tentative indications of an improvement in the US economy may have contributed to the increased demand for manufactured goods. “Nevertheless, a sustained recovery in demand hinges on improvement in domestic demand and better GDP growth prospects in the EU and US economies,” he said.

Following the sharp destocking in April, the inventory index continued to improve in June, increasing to 55. However, manufacturers appear to be cautious of building their inventories too quickly as global and local economic conditions remain uncertain.

The price index remained largely unchanged, declining by a mere 0.2 points to 82.2 in June. This relatively high level indicates that manufacturers face sustained input cost pressure. A significantly weaker rand may have also contributed to high input costs in the month. “With the rand trading above R10/US$ for most of the month, imported materials used in the manufacturing process would have been more expensive to acquire,” Davids explained.

“While the latest PMI results show that conditions improved marginally, the outlook for the sector is expected to remain challenging in an environment of muted demand and relatively high input prices,” he concluded.

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