PMI retreats, but Q2 averages higher than Q1

The seasonally-adjusted Absa Purchasing Managers’ Index (PMI) dipped back to just below the neutral 50-point mark in May. The index declined to 49.8 index points, down from 50.9 in April. Despite the fall, the average level of 50.4 points recorded during the first two months of Q2, 2018, is not only above the neutral 50-point mark, but also higher than the 49.2 index points registered in Q1, 2018. This bodes well for a recovery in the manufacturing sector, after manufacturing output contracted on a quarter-on-quarter basis in Q1, 2018.

Among the PMI’s key sub-components, the new Sales Orders Index managed to remain above the neutral 50-point mark for a second consecutive month, despite a 5-point decline from the unusually high level reached in April. At 51.5 points, the index is not only comfortably above the neutral 50-point mark, the index’s average level recorded in Q2, 2018, is also well above the Q1 average. If sustained, this bodes well for output growth in the coming months.

Unfortunately, actual output growth likely disappointed in May as the Business Activity Index removed some of the gains made in April, correcting to 47.2 index points from 49.1. The seeming inability of output growth to gain traction is somewhat disappointing, but should new sales orders be sustained at current levels, output is expected to tick up in the coming months.

Another hope for output growth going forward is that the Inventories Index (despite an increase to a 13-month high of 49.4 index points) is still below the new Sales Orders Index.

Despite recent fluctuations in the Business Activity Index, the Employment Index remained more or less unchanged at just above 49 index points for a third consecutive month.

The index tracking expected business conditions in six months’ time fell to 65.3 index points from 69.6 points in April. While the current reading is well below the 79.1 index points reached in February, it is significantly higher than the average recorded during 2017 and continues to suggest an expectation of improved conditions going forward.

The Purchasing Price Index dipped slightly lower after pointing to an acceleration in cost pressures in the two preceding months. The index fell to 65.5 points from 66.9 in April. This was despite a weaker Rand exchange rate and a higher Brent crude oil price compared to the previous month, which usually leads to higher costs.

The fuel price hike on 6 June means that a further moderation in cost pressures is unlikely.

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