Absa’s latest South African macroeconomics report paints a gloomy picture of the business environment with a decline in manufacturing and lower vehicle sales.
The bank said business conditions deteriorated in the manufacturing sector in September, with its manufacturing PMI falling to 48.2 points from 52.1 in August.
Load-shedding is the major cause of the lower manufacturing figures. It also means monthly manufacturing figures are highly volatile.
The seasonally adjusted business activity sub-index of the Absa PMI, analogous to output, fell sharply to just 38.5 in September after improving to 50.6 in August from 39.8 in July.
Meanwhile, new sales orders also weakened in September. The Bureau for Economic Research (BER) said the export index fell for the fourth consecutive month.
There is some good news, with input costs and the prices paid by manufacturers falling to their lowest level in over a year.
That said, manufacturers were less optimistic about the outlook six months into the future.
Absa believes the negativity reflects ongoing domestic power supply constraints and a more challenging global backdrop.
The chart below shows the load shedding intensity in South Africa since 2020.
Vehicle sales decline
Domestic vehicle sales also ended the third quarter on a weak note.
Data by the Automotive Business Council reveal that new domestic vehicle sales fell further by 4.6% month-on-month in September after falling 5.9% in August.
As a result, year-on-year growth slowed from 14.2% in August to 10.8% in September, worse than our forecast of 13.6%.
A 6.2% month-on-month fall in passenger vehicle sales was the main driver of the overall decline in domestic vehicle sales.
In recent months, rising interest rates and subdued consumer confidence have dampened consumer demand for big-ticket durable goods.
The situation was aggravated by shortages of new car stock, which also continued to lower sales.
The rand weakens
Since April, the South African rand has fallen victim to heightened levels of global risk aversion, broad-based US Dollar strength, and softer commodity prices.
This year’s increase in local institutions’ prudential limits may aggravate rand weakness if global risk aversion persists.
Prevailing customer foreign currency (CFC) balances imply limited scope for the rand to benefit from the repatriation of local exporter earnings.
However, Absa believes that a lot of bearishness is already priced into the exchange rate, given that all three of our valuation models imply that the rand is oversold.
“Therefore, we believe the ZAR can recover to R16.75/USD by year-end and R16.00/USD by Q1 23,” Absa said.
The chart below shows the USD to ZAR rate since April.