Unchanged PMI dashes hopes that August decline was temporary

The Purchasing Managers’ Index (PMI) remained virtually unchanged at a weak level of 43.2 points in September 2018. “The latest figure dashes any hope that the sharp PMI decline in August was a once-off occurrence”, said the Bureau for Economic Research (BER) in its monthly PMI report.

The average level of the PMI in Q3 of 2018 was 46 index points, which is the lowest average since Q3 of 2017 and 3.5 points below the average recorded in Q2 of 2018.

“While high-frequency activity data from Statistics South Africa suggests that the economy will exit the technical recession in Q3 of 2018, the PMI survey inspires little hope that the economy staged a strong recovery”, said BER.

The PMI edged lower owing to declines in three of the five sub-components of the headline index. Of the key sub-components, only the Suppliers’ Deliveries Index came in above the neutral 50-point mark.

The Business Activity Index managed to gain 1.5 points in September, but, despite the uptick, remained well below the neutral 50-point mark, signalling that manufacturing output is under significant pressure.

Worryingly, the New Sales Orders Index edged even lower during September. The average recorded in Q3 is more than 8 points below the average reading in Q2. As respondents still noted an improvement in export orders, the weakness is more than likely driven by poor domestic demand conditions, including from the South African mining and retail sectors.

The Employment Index lost further ground in September and at 42 points is now at its lowest level in more than four years. Despite a solid reading in July, the average level of the index during Q3 was more than 2 points below the average recorded in Q2. This does not bode well for employment prospects in the sector after it shed jobs in Q2.

According to Statistics South Africa’s Quarterly Employment Statistics, formal employment in the manufacturing sector fell by 12 000 jobs on an annual basis and by 13 000 compared to Q1.

After six consecutive declines, the index tracking expected business conditions in six months’ time moved slightly higher in September – rising to 45.8 in September from 44.6 in August. This is still a very weak level and is more than 10 points below the average recorded during the last ten years (which includes the 2008/2009 recession).

The PMI’s leading indicator also stayed below one, with inventories outstripping sales orders, which usually does not bode well for manufacturing output going forward. The Inventories Index edged down to 49.3 points from 50.7 in August, which was the first above-50 reading since March 2017.

The Purchasing Price Index rose by 6.2 points to reach 85.9 in September – the highest level since early 2016 – on the back of a significantly weaker Rand exchange rate and higher Brent crude oil price (compared to the previous month). This pushes up the cost of imported intermediate goods and raw materials.

Despite the price pressures, the Purchasing Commitments Index recovered somewhat from last month’s decline and rose by 2.4 points to reach 42.8.