The direct impact of the platinum strike is evident in today’s Purchasing Manager’s Index which remains stubbornly in pessimistic territory (below 50). Were it not for that destructive event, now being followed by a potentially even more hurtful strike by 220 000 NUMSA members in the engineering sector, one would expect relatively benign economic conditions. As an open economy, South Africa is greatly influenced by the economic health of its major trading partners, and right now the PMIs in China, the US and the Eurozone are all above 50, the base level for optimism. Kagiso’s head of research Abdul Davids joined us on CNBC Africa’s Power Lunch today to unpack why SA is so badly out of step. – AH
ALEC HOGG: Some breaking news just to hand from Reuters: a bomb blast has hit a busy market in northeast Nigeria, killing at least eight people. Troops have announced the arrest of a businessman suspected of helping Islamist militants carry out attacks, including the kidnap of over 200 schoolgirls.
GUGULETHU MFUPHI: Well, turning our attention now to some local news, the Kagiso Purchasing Managers Index recovered slightly in the month of June, edging up to 46.6 index points and that’s from 44.3 points in the month of May. Abdul Davids, Head of Research at Kagiso Asset Management joins us now for more. Abdul, it’s good to have you with us – joining us from Cape Town. The uptick in PMI – to me, I would be cautious that this might be short-lived. Is this the case?
ABDUL DAVIDS: We definitely think so. If one looks at the driver of the uptick, it’s really being driven by the Employment Index – more normalising, than recovery. If one looks at the two main indices or sub-indices, new sales orders, and business activity levels, they still deteriorated through the month of June. I wouldn’t read too much into the rebound that we’ve seen. Clearly, in terms of the absolute number at 46, it’s still well below the 50 level, which indicates expansion in the manufacturing sector in South Africa.
ALEC HOGG: It’s extraordinary to think that we’re into the first day of the second half of the year already Abdul, and so far – not so good. Clearly, there’s a lot of debate about whether we’re entering a recession or whether the country’s actually going to contract economically this year. How are you seeing it?
ABDUL DAVIDS: All the indicators point to the fact that we’re potentially already in a recession. Anecdotally, I think last month we spoke about some of the feedback that we get from manufacturing companies. Many of them, admittedly due to the platinum strike that was recently resolved, felt the brunt of recessionary conditions in terms of demand for their product etcetera. As we speak, there’s obviously the NUMSA strike that started today as well, so I think the second quarter of this year, by all accounts, has been another poor quarter and I wouldn’t be surprised to see another number below zero in terms of GDP for the second quarter as well.
GUGULETHU MFUPHI:Â What would that mean for PMI going forward, Abdul?
ABDUL DAVIDS: Again, if one looks at the three main drivers of the PMI…the activity level, new sales orders, and then what I call the leading indicator – all three are pointing negative and are well below expansionary territory. In addition, if one looks at the quarterly averages in particular, the quarterly average for the second quarter was around 46 in terms of the headline PMI, so I would hazard to say that we would probably see another number below 50 in terms of the July numbers coming through, as well.
ALEC HOGG: So anything below 50 means people are negative on balance. It is a pity because the U.S.A. is 57.5 and China is 52. If we didn’t have these issues on the labour front – given what’s happening in our major trading partners and most parts of the world that affect us, would we be above 50, do you think, at this point?
ABDUL DAVIDS: It’s difficult to say, but I would think we definitely should be above 50 or just around the 50 level. If one looks at our three major trading partners – U.S.A., China, and the Euro Zone – admittedly, some of them have hovered around 50 or are just stabilising, but they’re all above 50 as well. Typically, there’s always been a strong correlation between our PMI and our foreign trading partners’ PMI’s as well. Admittedly, we have seen the Rand strengthening over the last year. The Rand has been soft in the past too, and obviously, that has contributed to greater exports so in the absence of any normalisation of activity levels in the sector, we should potentially see a number above 50 coming through.
GUGULETHU MFUPHI:Â What about the fundamental flaws in the local economic structure in South Africa?
ABDUL DAVIDS: I don’t think we have enough time to talk about all those fundamental flaws. In the past, we have seen that the three major issues that the industry and sector is grappling with, is clearly skill shortages in the right areas. Admittedly, we’re sitting with significant unemployment and obviously, the type of skills that we have…the skills required are in short supply but obviously, the unskilled are in abundant supply. The other issue is this productivity level for that semi-skilled sorts of levels as well – we are not productive enough to make us competitive with global manufacturing peers, especially the likes of China. The last issue is around the average costing methodology in terms of input cost, for example, energy costs and processing costs. We obviously have seen significant increases over the last couple of years in terms of those costs, which has contributed to us not being competitive as well. Over the last year, we have seen the Rand obviously tempering a bit of that by the Rand weakening. It has improved us on a relative basis, but I think those three issues are fundamental and unfortunately, are not going to go away.
ALEC HOGG: It all sounds rather crazy, doesn’t it Abdul? The way that you’ve unpacked it with our productivity bad and with our input costs bad, we should be going in the other direction rather than trying to worsen the situation, but I guess that’s what happens in a country where the Employees are disaffected from the Employers.
ABDUL DAVIDS: Unfortunately, that’s the South African reality. I think we have seen…not just in manufacturing, but we’ve seen it in the platinum sector and we saw it in the run-up to the elections – disaffected (not just Employees). These are obviously workers, but they’re also human beings. They’re also citizens of the country and basic needs like service delivery in terms of sanitisation and housing etcetera: those are critical and in short supply and I think those are the fundamental problems that we’re grappling with, unfortunately.
ALEC HOGG: So if you don’t get the basics right, you reap the whirlwind everywhere. That was Abdul Davids, Head of Research at Kagiso Asset Management.
We’re heading into a short break. After the break, we’ll take a look at high municipal rates, and what they mean for commercial property.
