Improvements in business activity and new sales orders in PMI

Improvements in business activity and new sales orders in the third quarter in the Absa Purchasing Managers’ Index (PMI) puts it back in expansionary territory with a good outlook for another slight expansion for the fourth quarter.

The index, compiled by the Bureau for Economic Research (BER) at Stellenbosch University, increased to 52.6 points, up from 50 in October, with an average level of 49.6 recorded in the third quarter.

However, next week’s official data on factory production in October, as well as the extent of the impact of the prolonged strike at Transnet, will help to firm up the outlook for the fourth quarter.

The PMI is an economic activity index based on a survey conducted by the Bureau for Economic Research (BER) and sponsored by Absa.

The BER says it was encouraging that business activity and new sales orders improved for a second straight month after both plunged lower during the load shedding heavy month of September.

New sales order volumes expanded for the first time since May 2022, but the activity index remained stuck just below 50 points, while the employment index also lingered at a much lower level.

As cautioned in the past, higher demand and output levels would likely need to be sustained for some time for any improvement in staffing levels to occur.

BER also found it encouraging that purchasing managers turned more upbeat about business conditions going forward, with the index tracking expected business conditions in six months’ time rising to 51.7 from 49.2 in October.

ALSO READ: SA factory activity improves but Transnet, load shedding challenges persist

PMI largely unchanged

Overall, the PMI remained largely unchanged in November, corresponding to price pressure at the start of the production process remaining elevated, but less intense than at the beginning of the year.

The recent decline in the Brent crude oil price, as well as a somewhat stronger rand exchange rate against the US Dollar bode well for the general downward trend to continue through the final month of the year, but this was before the Phala Phala report.

“Still, with load shedding expected to continue, the [more] frequent usage of diesel-powered generators adds to the cost burden of producers,” BER says.

The business activity index ticked up further in November, but unlike the new sales orders index, did not manage to edge back above the neutral 50-point mark.

“Still, the higher average of the business activity index relative to the third quarter suggests that a further slight expansion in actual manufacturing output is possible for the fourth quarter.”

BER says this is remarkable given the extent of load shedding, but to some extent it is also driven by temporary boosts, especially from vehicle production.

ALSO READ: PMI plunges again due to load shedding

New sales orders were the PMI star

The new sales orders index recorded another solid increase in November, pointing to an increase in order volumes for the first time since May 2022. It was also encouraging that export sales improved relative to October when external trade was constrained by the labour strike at Transnet, BER says.

After an unexpected drop in October, given the improvement in activity, the employment index recovered most of these losses in November and BER says we will likely need to see a sustained rise in demand and activity before any meaningful improvement in staffing levels.

The inventories index stayed above the neutral 50-point mark for another month and, in fact, ticked up slightly relative to October.

The supplier deliveries index also stayed at more or less the same level for a third month, but the current level is much lower than through most of 2020 and 2021, although it is still fairly high compared to what it was before the pandemic.

BER says this suggests that supplier deliveries are still slower (as a slowdown in deliveries results in an increase in the index) which points to continued constraints in global supply chains.

ALSO READ: Absa PMI shows some recovery for factories, thanks to less load shedding

Expansionary territory for PMI

According to economic research group Oxford Economics Africa, a general improvement in the manufacturing PMI’s subcomponents means that the headline index lifted further into expansionary territory during November.

“The latest uptick in the PMI builds on October’s improvement and suggests that actual manufacturing output increased in the final quarter of the year. However, current conditions are far from ideal with looming recessions in several major economies posing downside risk.”

The group says labour strikes and sporadic power outages, as well as cable theft and breakdowns, meant that 2022 has been a stop-and-go year for the South African economy.

“That said, there is underlying resilience in the economy as well as countervailing forces at work, which are undermining economic activity and suggest that it will likely take a while before we witness sectoral synchronisation.”