Absa PMI shows worrying deterioration in demand and activity
The deterioration in demand and activity in the Absa PMI shows that all is not well with the gross domestic product of the country.
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The Absa purchasing managers’ index (PMI) for June shows a worrying deterioration in demand and activity, as it declined to 52.2 index points in June from 54.8 in May.
After a stellar performance at the start of the year, the sector is likely to be a big drag on GDP in the second quarter.
The Absa PMI is an economic activity index based on a survey conducted by the Bureau for Economic Research (BER) and sponsored by Absa.
The business activity index indicated a contraction in output for the third consecutive month, with the average level for the second quarter of 45, much lower than the average recorded in the first quarter when it was 58.9.
Destructive flooding in KwaZulu-Natal, sustained supply chain friction and significant load shedding all weighed on output. After an encouraging recovery in May, the new sales orders index returned to negative terrain in June.
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Deterioration in demand
Export sales were just on the positive side, which means a big drag also came from the deterioration of domestic demand. The sharp downtick in the supplier deliveries index in May was not sustained in June, which shows that delivery times increased once again.
As the index tracks month-on-month movements, the improvement in May was relative to April, when South African logistics were hampered by the flooding in KwaZulu-Natal, with conditions normalising, if not worsening, in June.
According to the Absa PMI, a few respondents referred to shortages of raw materials and delays at ports hampering their business and unfortunately this means that the increase in the supplier deliveries index should therefore not be seen as positive where higher demand causes slower deliveries, but rather that deliveries are most likely slowed down due to disruptions.
However, a positive takeaway from the latest survey is from the employment index, which indicated an uptick in staffing levels, with the average for the second quarter suggesting that the sector may continue to add jobs after five consecutive quarters of formal job growth.
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The future also does not look good
A worrying, although expected, development was a decline in the index tracking expected business conditions in six months’ time.
This index fell to 53.8 in June, down by almost 10 points from May, indicating the least optimistic purchasing managers have been this year, although the majority of responses were received before the recent ramping up of load-shedding.
This could have contributed to a recession along with growing concern about a sharp growth slowdown and potentially recession in some of South Africa’s key trading partners. With another downward move in June, the business activity index has been stuck in negative terrain since April.
The average level of 45 for the full quarter is much lower than the average of 58.9 recorded in the first quarter, suggesting that after a stellar performance at the start of the year, the sector could be a big drag on GDP in the second quarter.
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Business activity
Regarding business activity, the Absa PMI shows that after an encouraging recovery in May, the new sales orders index moved back into negative terrain in June. Export sales were only just positive, which means a big drag possibly also came from the deterioration in domestic demand.
The employment index once again ticked up above the neutral 50-point mark and the average of 51 for the second quarter suggests that the sector may continue to add jobs after the official data showed five quarters of consecutive job growth.
According to the Quarterly Employment Statistics, formal manufacturing employment rose by just under 8 000 jobs in the first quarter of the year and is up about 73 000 relative to the first quarter of 2021.
The purchasing price index remains below the record-high 95.9 recorded in March, which means that while cost pressure remains significant, it likely peaked earlier in the year. .
This would still be consistent with producer (which tracks factory gate prices unlike the PMI index which looks at input costs for factories) and consumer price inflation moving higher in the next several months before also likely starting to slow down towards the end of the year.
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First quarter’s stellar performance not repeated
Reacting to the latest PMI, economic research group, Oxford Economics Africa, said it is becoming increasingly evident that the stellar performance of manufacturing in the first quarter will not be repeated in the second quarter.
“It is perhaps telling that the index tracking expected business conditions in six months’ time dropped to 53.8 in June by almost 10 points on a monthly basis, which is the least optimistic purchasing managers have been so far in 2022.”
The group says the latest bouts of intense load shedding will undoubtably affect the manufacturing sector negatively and add to the generally downbeat sentiment permeating the country and dent business and investor confidence.
“After the better-than-expected 1.9% expansion in the first quarter, we forecast a 0.7% quarter-on-quarter contraction in the second quarter real GDP and expect sluggish growth in the quarters thereafter, which should see the South African economy expand by 2.1% in 2022 compared to 4.9% in 2021,” the group said.
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