South African economy under pressure
While Absa’s Purchasing Managers’ Index (PMI) improved somewhat in August, some artificial factors pushed the number up, and the underlying indices reveal a struggling economy.
The Absa PMI rose by 2.4 points to 49.7 in August, just below the neutral 50-point mark.
Absa said the increase in the headline PMI was driven by the business activity index, which jumped by almost 12 points to 50. This follows a significant decline of nearly 11 points in July.
Although the magnitude of the rise in business activity gives an impression of some strength here, at 50, the index points to flat month-on-month manufacturing output growth in August.
Albeit not nearly to the same extent, the new sales orders index was also higher in August. Even so, this index remained well below the level of 50, separating expansion from decline.
This continued to reflect subdued demand for local manufactured goods.
Another PMI subcomponent worth highlighting is the supplier delivery index. This index, which is inverted to show an increase when delivery lead times are longer, increased further in August to lift the headline PMI.
In the pre-Covid environment, longer lead times were usually associated with stronger demand conditions in the factory sector.
However, the further lengthening of delivery times in August followed a significant jump during July, when orders probably took longer to arrive amid disruptions linked to the torching of several trucks on the N3 transport corridor.
In August, the week-long taxi strike in Cape Town, which led to significant worker absenteeism across sectors, most likely explains the further lengthening of delivery times.
Because the most likely reason for longer delivery times in August was a supply-side constraint as opposed to higher demand, the headline PMI was, at least to some degree, again kept afloat artificially.
Another noteworthy development in August was a marginal rise in the PMI price index after a significant decline in July.
With a substantial diesel price hike of more than R2.50/litre looming in early September, this indicator can rise further in the near term.
After hovering between 47 and 48 in June and July, the PMI employment index sagged by around 4.5 points to a lowly 42.8 in August.
Absa said this does not bode well for the official employment stats in the factory sector.
Business activity
Off a low base, the business activity index increased notably in August. Even so, at 50, the index points to flat month-on-month manufacturing production growth.
It remains unclear what drove the significant decline in this index during July. Besides the ongoing impact of load-shedding, in terms of specific constraints on output in August, Absa said the week-long taxi strike in the Western Cape comes to mind.
Anecdotal evidence suggests that several manufacturing facilities were impacted by worker absenteeism associated with the strike.
New sales orders
The new sales orders index saw a marginal improvement in August but remained well below the key level of 50.
This suggests that the underlying demand for locally manufactured goods was still under pressure. An improvement in export sales during the month helps to explain the modest increase in this index.
Employment
After hovering between 47 and 49 points of late, the employment index slowed down in August to 42.8.
According to Stats SA’s Quarterly Labour Force Survey, formal employment in the manufacturing sector declined by 53,000 quarter-on-quarter in 2023Q2.
The PMI figures for July and August do not instil confidence in a recovery in the factory sector job market during the third quarter.
Inventories
At 48.3, the inventories index remained essentially unchanged for a third consecutive month in August.
Supplier deliveries
Following a notable gain in July, the supplier deliveries index rose further in August.
This index is inverted in the headline PMI index calculation, implying that longer supplier delivery (lead) times boost
the headline PMI.
In August, the week-long taxi strike in Cape Town which led to significant worker absenteeism across
sectors, most likely explains the further lengthening of delivery times.
Therefore, as in July, longer lead times in August do not reflect strong demand from the manufacturing sector.
Purchasing prices
The purchasing price index rose somewhat in August after significant declines in the previous two months. This may reflect the more than 70c/litre diesel price increase at the start of the month.
With a substantial diesel hike of more than R2.50/litre looming in early September, the price index, which measures monthly price changes, can rise further in the near term.
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