Economic activity: employment and deliveries looking better, but not prices

Economic activity slipped back below the halfway mark of 50 in March, although employment and deliveries were looking more positive. However, purchasing prices did not look good and business activity and new sales also declined.

The Absa Purchasing Managers’ Index (PMI) is an economic activity index based on a survey conducted by the Bureau for Economic Research (BER) and sponsored by Absa. The monthly surveys are conducted under a representative group of purchasing managers in the South African manufacturing sector who indicate each month whether a particular activity for their company has increased, decreased or remained unchanged.

An index value of 50 indicates no change in the activity, a value above 50 indicates increased activity and a value below 50 indicates decreased activity.

The PMI declined from 51.7 in February to 49.2 in March and has been choppy in recent months, but the average for the first quarter of this year is equal to the final quarter of last year, the BER says. In the fourth quarter, the gross value added by the sector managed to eke out a 0.2% quarter-on-quarter expansion, with a more robust annual increase.

ALSO READ: Manufacturing PMI returns to positive territory in February, but prices are a problem

Business activity and new sales orders take a dive in economic activity

After robust improvements in February, the business activity as well as the new sales orders index declined in March, though they remained above recent lows seen in January. The BER says comments by respondents suggest that demand conditions were sluggish.

After a surprisingly robust increase in February, the business activity index dropped back in March. The activity has been volatile of late, but if one considers the average of the first quarter of 2024 relative to the fourth quarter of 2023, the activity index is slightly down. It increased to 48.6 in February from 37.1 in January but dropped back to 44.5 in March.

The new sales orders index declined to 45.5 index points in March after reaching 49.9 in February from 37.2 in January.

ALSO READ: Huge drop in economic activity shows weakness of economy – PMI

Good news from supplier deliveries in economic activity

A potentially more positive development was the steep decline in the supplier deliveries index which declined from 62 in February to 54.1 in March. The BER says the reason for this being potentially positive news is that it could be one of the first signs that congestion at the local ports is easing somewhat and deliveries of (imported) supplies are now coming through faster.

This index is inverted and faster deliveries result in a decline in the index as faster deliveries during times of uncongested and unconstrained supply chains are generally seen as a negative for the sector because it means suppliers are less busy and therefore, goods can get to the respondent faster.

“This could have played some role in March given that demand for manufactured goods weakened and assumingly so did demand by manufacturers for inputs. However, given respondents’ commentary over recent months and other (anecdotal) evidence, better-working supply chains are a more likely reason for the improvement in delivery times.”

The BER says this could, over time, also lift inventories of intermediate goods and raw materials, which ticked down slightly in March.

ALSO READ: Economic activity up in December but domestic demand remains weak – PMI

Purchasing managers feel better about the future

Another positive development was the further improvement in sentiment towards business conditions in the future. The index tracking expected business conditions in six months’ time rose to a solid 62.1 points. The BER says this is the most upbeat respondents have been about business conditions since the start of 2023.

However, it is more concerning that cost pressure continues to build with the purchasing price index up for a fourth consecutive month. This is likely, to a large extent, driven by increases in the fuel price, the BER says. The index is now somewhat above its long-term average reading at 74.6 in March from 72.2 in February and 67.5 in January.

The BER also says the recent solid upward trend in the employment index is encouraging.

“While we tend to caution against reading too much into sudden movements in an index, the employment index has been on a steady increase in recent months and this could bode well for job growth in the sector. It was 54.4 in March, up from 49.2 in February and 45.2 in January.

The inventories index declined slightly in March to 47.6 but remained well above a recent low of 37.7 reached in January.

ALSO READ: Absa PMI shows subdued economic activity in fourth quarter

Dismal demand for manufactured goods

Jee-A van der Linde, senior economist at Oxford Economics Africa, says the overall picture still points to dismal demand for manufactured goods.

“The newest PMI reading aligns with a series of choppy economic data releases for South Africa in recent months. Domestic economic activity increased by 0.1% quarter-on-quarter in the fourth quarter of 2023 and the latest PMI numbers imply a generally similar picture for the first quarter of 2024.”

In addition, he says, the latest hard data releases for January showed that the South African economy had a fairly mixed performance ahead of February, which saw a sudden intensification in load shedding that would have disrupted production and weighed on economic activity.

“Consequently, we anticipate sluggish economic growth in the first quarter of 2024, with the overall economy forecast to grow by 0.7% this year.”