Huge drop in economic activity shows weakness of economy – PMI

The huge drop in economic activity demonstrated in January by the Absa Purchasing Managers’ Index (PMI) shows the weakness of the economy and reflects a very poor start to the year for the local manufacturing sector.

The headline index declined to 43.6 index points in January, down from 50.9 in December, which is very concerning as the decline came on the back of a sharp deterioration in demand and activity. The PMI has only fallen to this low point a handful of times outside of the global financial crisis in 2008/2009 and the pandemic-induced lockdown period of 2020.

The PMI is an economic activity index based on a monthly survey conducted among a representative group of purchasing managers in South Africa’s manufacturing sector by the Bureau for Economic Research (BER) and sponsored by Absa. These purchasing managers indicate each month whether a particular activity, such as new sales orders, for their companies increased, decreased or remained unchanged.

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Business activity plunges due to decline in demand

After an encouraging uptick in December, the business activity index plunged to 37.1 index points in January from 51.4 in December, despite relatively less load-shedding in January compared to most of 2023. According to the BER, it is likely linked to the sharp decline in demand, while a lack of materials and goods required in the production process may have also held back output.

The decline in output was probably driven by a sharp decline in demand as the new sales orders index collapsed to 37.2 index points from 46.3 in December, with some respondents referring to demand being lower than usual.

In addition, export orders were stuck below 50 for a third month, which does not happen often. A lack of materials and goods required in the production process may also have held back output.

The inventories index declined once more, to 37.7 in January from 44.4 in December and reached the lowest level since mid-2020. The BER says it could be that local harbour issues prevented imported stocks from reaching manufacturers as the question purchasing managers had to answer in the survey pertains to purchased stock of materials and goods used in normal business or activities.

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Employment static despite drop in economic activity

Despite the sharp drop in activity, the employment index barely moved in January recording 45.2 after reaching 44.8 in December. This does not point to job growth in the sector, the BER says.

After four consecutive increases, the supplier deliveries index declined to 61 points in January from 67.7 in December and the BER says this may signal some improvement in the delivery times of supplies, as this index is inverted which means that an increase in supplier performance results in a decline in the index.

“This would be a welcome development but unfortunately, the downtick in the index may also reflect a worsening in demand for supplies which is generally seen as a negative for the sector.”

The purchasing price index increased for a second consecutive month to 67.5 in January from 62.1 in December. According to the BER this was likely driven by a weaker rand exchange rate and a higher Brent crude oil price relative to December, especially later in the month when the survey was conducted.

This is still somewhat below the average recorded in 2023 and well below 2022, suggesting that upward price pressure remains fairly benign. “Price pressure is still significantly less intense compared to 2022, but the upward tick suggests that price dynamics remain sensitive to shocks,” the BER says.

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Despite current economic activity woes, there is still optimism

However, despite current woes, respondents were more optimistic about business conditions. The index tracking expected business conditions in six months’ time rose to 58.7, up from 57.9 in December.

The BER says it is perhaps important to highlight that the survey asks respondents to compare their expectations relative to current conditions.

“Therefore, the improvement means that conditions are expected to be better than the current dismal environment, not better relative to ‘normal’ or long-term business conditions.”

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Magnitude of PMI drop out of ordinary

Jee-A van der Linde, senior economist at Oxford Economics Africa, says the magnitude of the PMI drop is out of the ordinary given that there were no major events that would have precipitated such an outsized decline.

“However, the results perhaps indicate how weak domestic demand conditions are at the moment. In any event, the first leading indicators for the year support our view that South Africa enters 2024 with hardly any economic momentum and real gross domestic (GDP) growth is expected to pick up only modestly to reach 0.7% this year, compared to the consensus forecast of 1.2%.”

He says supply-side constraints will continue to undermine growth in the first half of the year, with the peak impact of tighter monetary policy also likely to still weigh on consumer pockets during this time.