PMI improves but still points to manufacturing contraction

 

The seasonally adjusted Kagiso Purchasing Managers’ Index (PMI) reached a level of 49.5 in November, suggesting sentiment and production improved after most of the workers who had participated in wildcat strikes in August and September returned to work.

However, the index remains below the important 50-point level that marks the difference between a contraction and expansion in sector activity.

The weak PMI data is in line with the trends currently at play in some of our key trading partners, said Abdul Davids, Head of Research at Kagiso Asset Management.

“PMI readings in the eurozone, the leading foreign market for our locally produced goods, remain in contraction,” said Davids.

However, China is showing some improvement as its November PMI reading rose to a 13-month peak of 50.4.

South Africa’s average PMI reading for the first two months of the fourth quarter is 48.3, lower than the average level achieved in the third quarter (50.1).

Davids said the declining trend in the average PMI suggests that the manufacturing sector’s contribution to fourth-quarter gross domestic product (GDP) could be lower than the third quarter.

The PMI’s business activity index gained 2.7 points to 45.9. Davids said that while this was an improvement, the level of the index continued to suggest output remained under pressure.

“Similarly, while new sales orders rose by 2.4 points, its level of 47.7 points to persistently weak demand,” he said.

Following gains in September and October, the Expected Business Conditions Index declined significantly by nearly 5 points. In addition, the PMI Leading Indicator remained below 1, indicating that supply continues to outstrip demand.

The employment subindex showed some positive news as it broke through the 50-point mark to reach 52, its highest level this year. But Davids warned against reading too much into this improvement, saying recent research showed executives in the manufacturing factory sector were pessimistic about employment trends and expected a further deterioration in the job market during the first quarter of next year.

Meanwhile, Davids attributes a rise in input costs over the last few months predominantly to the weaker rand, which averaged R8.78/US$ in November compared to R8.65US$ in October. The input price index recorded its highest level since January 2012.

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