PMI recovers, but SA manufacturing sector remains weak

The seasonally adjusted Kagiso Purchasing Managers Index (PMI) gained 2.8 index points in July to reach a level of 51, after having contracted to below the key 50-point level in June. The local manufacturing sector remains under strain owing to lower demand from our key export markets, said Abdul Davids, Head of Research at Kagiso Asset Management.

The improvement in the Index was broad-based, with most of the sub-indices showing gains. The New Sales Orders Index was the largest contributor, having increased by nearly 6 index points to 52.2. However, Davids pointed out that this result does not necessarily suggest stronger demand.

“The increase in the New Sales Orders Index was not driven by a greater number of managers’ reporting increased orders, but rather by the fact that orders remained unchanged. This indicates that demand appears to have stabilised following the steady decline we have seen since February,” he explained.

Similarly, the Business Activity Index gained 3.8 points to reach 50.8 after the majority of managers’ indicated that activity levels remained unchanged from June to July. Despite higher oil and commodity prices in July, the Price Index continued to decline and is now at 62.7, its lowest level since the end of 2010. “As a result, we expect Stats SA’s Producer Price Index, which has remained steady at 6.6% year-on-year for the last three consecutive months, to start moderating,” said Davids.

After declining by just over 6 points in June, the Employment Index increased marginally during July to reach 47. According to Davids, this confirms that employment prospects in the local manufacturing industry remain limited which is expected to persist for the remainder of this year.

Looking ahead, the index measuring expected business conditions over the next six months declined to 54, its lowest level since September 2011, as purchasing managers’ continued to lower their expectations. “This is a clear signal that conditions in the local manufacturing sector will remain weak for the foreseeable future,” said Davids. “This is in line with current conditions in China and the US, where the latest flash PMI readings came in at 49.5 and 51.8 respectively.”

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