Thank you load shedding! Manufacturing in SA down sharply

South Africans can thank load shedding for another setback. The Purchasing Managers’ Index (PMI) fell sharply to 48.8 index points in February from 53.0 in January, the first time since September 2022 that the headline index fell below the neutral 50-point mark.

PMI is an indicator of business conditions in South Africa’s manufacturing sector.

This points to a marked deterioration in business conditions in the factory sector, says Miyelani Maluleke, senior economist at Absa CIB. “The February survey period included an unprecedented seven consecutive days of stage 6 load shedding, which was likely top of mind for many respondents.”

He says load shedding once again featured frequently in the comments when respondents explained why activity declined relative to the previous month.

“A glimmer of good news was that export sales rose to the best level in a year, implying that producers supplying solely to the domestic market likely had a tough month, but the employment and inventories indices also came in below the neutral 50-point mark, in line with a weaker output picture.”

ALSO READ: Absa PMI shows increased business activity despite load shedding

Also no hope for the future

Maluleke says there was more bad news in the form of a sharp decline in the index measuring expected business conditions in six months’ time.

Business confidence fell to 46.8 points in February, the lowest level since May 2020 which means that respondents have not been this downbeat about future conditions since the country was slowly moving out of the strictest phase of the Covid lockdown.

The purchasing price index also surged higher for a second month to reach the highest level since September 2022. The survey took place while the rand was very weak against the US dollar, largely trading above R18 to the dollar.

“This would have filtered through to the costs of especially imported raw materials and intermediate goods. The surge in the PMI’s price index suggests that we may see a renewed acceleration in factory-gate prices. That said, the index remains well below the peak reached in the first months of 2022.” 

The Bureau for Economic Research (BER) at Stellenbosch University compiled the index that is calculated as the weighted average of business activity (0.20), new orders (0.20), employment (0.20), supplier deliveries (0.20) and inventories (0.20). The inverse of the supplier deliveries index is used in the PMI calculation.

ALSO READ: PMI up in December, but SA’s business activity gets even worse

Intense load shedding to blame

Economic research group, Oxford Economics Africa, says manufacturing PMI deteriorated to a greater extent in February than it anticipated, but the latest decline can be justified by the intense scale of load shedding experienced so far this year.

“The business activity index fell sharply, while retail sales remained downbeat in February. That said, export sales increased to the best level in a year. The purchasing price index posted another sizeable increase, portending a potential build-up in price pressures.”

The headline PMI dropping below the neutral 50-point threshold, for the first time since September 2022, signals a substantial deterioration in business conditions in South Africa’s industrial sector, the group says.

The business activity index (45.5) slipped into contractionary territory while the new sales orders index was little changed at 49.4 in February.

“While new sales orders remained downbeat in February, export sales increased to their highest level in a year, suggesting that domestic producers likely had a difficult month. Meanwhile, the employment index slipped deeper into contractionary space during February, with South Africa’s weakened economic growth outlook boding ill for future employment growth,” the group says.

The inventories index (46.5) slumped back to below the neutral 50-point mark in February, while the purchasing price index surged higher for the second month in a row to reach 78.6 – the highest level since September 2022.

ALSO READ: Improvements in business activity and new sales orders in PMI

Factory-gate prices set to increase

The group says the latest increase in the PMI’s price index suggests that a renewed acceleration in factory-gate prices may be on the cards. However, the index remains well below 2022 peak levels and after averaging 14.4% in 2022, it forecast PPI inflation to average 7.4% this year.

“February’s survey period included an unprecedented bout of stage 6 load shedding, together with a weak rand exchange rate during that month, which was likely top of mind for many respondents. Consequently, the index measuring expected business conditions in six months’ time plummeted to 46.8 in February, which is the lowest level since May 2020.”

The group noted its reservations about the sustainability of the PMI’s brief and unexpected improvement at the start of 2023.

“Recent signs of global economic resilience bode well for South African exporters, but this is counterbalanced by various local factors, including organised crime, power outages and downtime owing to inefficiencies at state-owned Transnet.”