June manufacturing activity slumps to lowest level in three months

By Rene Vollgraaff

(Bloomberg) – An index tracking South African manufacturing activity slumped to the lowest level since March.

The purchasing managers’ index compiled by the Stellenbosch-based Bureau for Economic Research and Absa Bank Ltd., dropped to 47.9 in June from 49.8 in May. A reading below 50 indicates contraction in the factory sector.

File Photo: A worker inspects cars at BMW’s manufacturing plant in Rosslyn, outside Pretoria. REUTERS/Siphiwe Sibeko

Business sentiment and the rand have wiped out all the gains that came on the back of President Cyril Ramaphosa’s ascent to the power since December. Manufacturing, which accounts for about 13 percent of gross domestic product, shrank in the first quarter, contributing to the economy’s biggest contraction in nine years. The PMI level suggests “that the sector is unlikely to stage a solid recovery,” Absa said in an emailed statement on Monday.

Power utility Eskom Holdings SOC Ltd. implemented rolling blackouts last month after protesters blockaded roads and attacked staff as wage negotiations broke down. This may also have damped confidence in June, Absa said.

Absa PMI down to 47.9 points in June

Absa media statement:

The seasonally adjusted Absa Purchasing Managers’ Index (PMI) fell further below the neutral 50-point mark in June. The index lost 1.9 points to reach 47.9, down from 49.8 points in May. The dip means that the average level recorded during the second quarter is only 0.3 points above the first-quarter average and still below the key 50 level. This suggests that the sector is unlikely to stage a solid recovery after output contracted on a quarter-on-quarter basis in the first quarter.

Arguably, the most disappointing result of the survey was another marked decline in the index tracking expected business conditions in six months’ time. The index declined for a fourth consecutive month to reach 55.7 in June. This is a staggering 23.4 points below the multi-year record high level of 79.1 recorded in February 2018 and below the average level recorded in 2017. Several factors may have dampened optimism over recent months. Perhaps of most importance is concern that the uptick in demand (based on the new sales orders index) in the second quarter may not be sustained. Furthermore, the return of loadshedding in recent weeks may also have been a specific dampening factor in June. For companies focusing on the export market, concerns about an intensification of the trade war between the US and the rest of the world could also explain the more muted expectations. Finally, rising cost pressures may also have weighed on expectations – the purchasing price index surged to the highest level recorded thus far in 2018. It must be noted, however, that the current level of the expected business conditions index still means that respondents expect conditions to improve from the current weak environment – just significantly less so than before.

All but one of the five subcomponents of the headline PMI were below the neutral 50-point mark in June – the exception being the suppliers’ deliveries index at 51.5 points. The new sales orders index lost 2.4 points to reach 49.1. The downtick in demand contributed to the business activity index shedding a further 1.4 points to 45.8 in June. The employment index also declined after remaining more or less unchanged for the preceding three months.