Absa PMI drops again – shows strain on SA economy

The Absa Purchasing Managers’ Index (PMI) dropped again in June, despite less intense daytime load shedding, suggesting continued strain within South Africa’s economy.

Further dropping below the neutral 50-point level, the latest survey data points towards weakening domestic demand with softer new sales orders and a broad-based contraction of PMI subcomponents.

The seasonally adjusted PMI, conducted by the Bureau for Economic Research (BER) at Stellenbosch University and sponsored by Absa, declined by 1.6 index points to 47.6 in June, the lowest level since mid-2021.

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In addition, all five subcomponents used to calculate the headline PMI were below the neutral 50-point level for the first time since 2018 and the BER says this points to worsening business conditions in the manufacturing sector.

“A key drag on the sector seems to come from weak demand, with the new sales orders index edging down once again as the decline in export sales deepened and domestic demand remains under pressure.”

Some positive news

However, there was some positive news, as the business activity index improved relative to May, although it remained below the neutral 50-point mark for a fifth consecutive month, rising from 47.7 to 48.9 in June.

The BER says the improvement was probably thanks to significantly less daytime load shedding, with weak demand conditions preventing a bigger recovery. The business activity index came in slightly lower than the first-quarter average for the full second quarter, but this is only due to a high January reading.

“Broadly speaking, the level of the business activity index suggests that momentum in official production data remained very subdued in the second quarter. Along with the improvement of business activity in May, there was also somewhat better news on the cost front, as the purchasing price index declined to the lowest level since the start of the year.”

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The index declined from 77 to 71.3, partly due to a stronger rand exchange rate compared to the previous month and a drop in the fuel price at the start of the month.

The BER also pointed out another notable development in the June survey, the turnaround in forward-looking sentiment. The index tracking expected business conditions in six months’ time rose from an extremely depressed 43.7 to 52.4 in June.

“The current level remains well below the long-term average, but at least signals that purchasing managers expect conditions to look better by the end of the year instead of worse.” 

Business activity improved in June to its best level since January 2023 supported by significantly less load-shedding, but the BER says production failed to return to growth territory amid continued weak demand. 

All sub-sectors of PMI below neutral 50

The new sales orders index lost some of May’s gains and fell back to 45.6 in June, with respondents reporting falling export sales, while domestic demand is likely also under pressure amid rising borrowing costs, sticky inflation and other headwinds. 

After three months of little change, the employment index rose by 2.3 index points to 47.9 in June. The index remained below the neutral 50-point mark throughout the first half of 2023. Following a surge in April, the inventories index declined for a second month and returned to roughly the average level of the first quarter. 

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The supplier deliveries index decreased to below the neutral 50-point mark for the first time since mid-2018, signalling faster deliveries of raw materials and intermediate goods, which in pre-pandemic times was a sign of weak demand in the sector.

“During the pandemic, the index surged and stayed high through 2021 and 2022, as global supply chains and local logistical issues strained delivery performance. However, recent surveys suggest that global supply chains are working much better, which in addition to weaker demand, likely contributed to a decline in this index. Note that this index is inverted and therefore, faster deliveries result in a lower index value and detract from the headline PMI.” 

The BER says after an uptick in the PMI in May on the back of a significantly weaker rand exchange rate, the index declined to the lowest level since the start of the year, while a stronger rand exchange rate and a decline in the fuel price at the start of June likely contributed to the moderation in price pressure. 

Weaker performance for manufacturing sector

Economic research group, Oxford Economics Africa, says the load shedding respite in June would have contributed to the turnaround in forward-looking sentiment.

“The index tracking expected business conditions in six months’ time increased from a gloomy 43.7 to 52.4 most recently.”

Fears of a national grid collapse during winter have eased, while stage 8 load shedding was averted up until now.

“That said, the national electricity grid remains inherently unstable and not much could have been done in the past month to meaningfully improve electricity production capacity,” the group says.

“And although industrial data for the second quarter has so far been better than expected the PMI average for the second quarter points to a weaker performance by the manufacturing sector. We expect an economic contraction in the second quarter and forecast real gross domestic product (GDP) to grow by 0.2% in 2023.”