PMI indicator does not bode well for output growth

The seasonally adjusted Absa’s Purchasing Managers’ Index (PMI) declined from 51.5 index points in May 2017, to 46.6 index points in June 2017. The Bureau of Economic Research (BER) said that “the deterioration was broad-based, with four of the five main subcomponents moving lower, compared with May.” The BER added that “the recent volatility is probably driven – or at least exacerbated – by continued uncertainty about the outlook for the domestic economy.” The uncertainty likely results in more erratic domestic orders, which may filter through to more volatile output patterns on a month-to-month basis.

BER stated that “several domestic releases, such as the economy having entered a technical recession, and business confidence plunging to recession low levels – as well as continued uncertainty on the political front during these months – may explain why respondents were notably more pessimistic about business conditions going forward.” In addition, the manufacturing sector is also bracing itself for a possible strike in the steel and engineering sectors, if a wage agreement is not reached soon. As such, the index forecasting expected business conditions six months ahead, fell from 61.4 to 50.0 in June. This is the lowest level since February 2016.

While the PMI paints a picture of subdued conditions in the manufacturing sector, the Purchase Price Index (PPI), indicates that manufacturers at least reported a deceleration of upward cost pressures. The PPI declined by 7 points to reach 61.3 index points in June – the lowest level since October 2016. The decline came on the back of an average $4 per barrel drop in the brent crude oil price, as well as the stronger Rand exchange rate, which traded below R13/$ for most of the month. The stronger Rand lowers the import cost of raw materials and intermediate goods used in the local production process. The notable fuel price decline at the beginning of July, is expected to lead to a further deceleration of upward cost pressures.

The Business Activity Index has been one of the PMI’s most volatile indices of late. The index slumped in April, before recovering in May, slipping lower again in June – but remaining much higher than in April. While Statistics South Africa data does not fully correspond to the swings in the index on a month-to-month basis, this data is also volatile. For example, since September 2016, the year-on-year percentage change in manufacturing output has alternated between positive growth one month, to negative growth the following month. Overall, manufacturing output was down by 1.8% year-to-date in April, and the average business activity index for May and June (48.9 points), suggests that this weakness is likely to persist.

The erratic nature of new sales orders is a big driver of the volatility in output. The average reading of 47.1 points for the second quarter, suggests that overall demand was under pressure. Not only does domestic demand remain weak, but respondents were also less optimistic about export orders. The stronger Rand exchange rate may weigh on manufacturers’ competitiveness in international markets.

In contrast to the swings in output, the employment index remained more or less unchanged at 47.1 index points in June. The index therefore stayed below the neutral 50-point mark, signalling a decline in employment. The inventories index ticked lower to 48.9 index points in June, from 49.7 in May. This marks the third consecutive month that the index stayed stuck in negative territory. Despite this, the index rose above the new sales orders reading -which means that the PMI leading indicator moved back below one. This usually does not bode well for output growth going forward.