PMI inches up as output and demand regain some losses

The seasonally adjusted Kagiso Purchasing Managers’ Index (PMI) recovered some lost ground in October, increasing to 50.7 index points from a revised 50 points in September. Despite the improvement, the index remained below the average reading of 52.7 noted during the third quarter of 2013.

The modest increase was expected, says Abdul Davids, Head of Research at Kagiso Asset Management.

“The sharp decline in September was largely driven by prolonged strike action in the vehicle manufacturing sector, which greatly affected the wider manufacturing industry. However, conditions remain restrained as some labour disputes spilled over into October.”

Following a significant drop in September, the Business Activity Index increased by 4.5 points to reach 52.6 in October. Given the constraints faced by the manufacturing sector, this level is more reflective of actual factory production trends, says Davids.

The New Sales Orders Index ticked up by 1.2 points to 50.6. While this signals an improvement in demand, the index level remains subdued and is more than three points below the average reading for the third quarter.

At 49.4, the Employment Index remained unchanged from the previous month, which does not bode well for employment creation in the sector. “The recent Quarterly Labour Force Survey from Stats SA indicates that the manufacturing sector lost 60 000 jobs year-on-year during the third quarter of 2013. In contrast, overall employment levels improved significantly over this period and the manufacturing sector was the only sector to record job losses,” says Davids.

On a more positive note, the Price Index continued its downward trend and lost nearly two index points to reach a level of 80.8, its lowest level since April. Davids points out that the decline in fuel prices in October is likely to have contributed to the moderation in input price pressure. “Given that another petrol price cut is expected for November, the index could continue trailing downwards. However, a weaker exchange rate and increased labour costs remain key risks going forward,” he cautions.

The outlook for the local manufacturing sector is more positive, with the index measuring expected business conditions in six months’ time rising by 10.4 points to reach its highest level (62.2) since March 2012. Given relatively soft local demand conditions, this may reflect increased confidence about the growth prospects in SA’s key trading partners.

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