Manufacturing PMI posts better start to third quarter

South Africa’s manufacturing PMI increased strongly to 52.4 in July, with a marked increase in the salient business activity and new sales orders indices, although from a low base, pointing to a stronger start to the third quarter.

The improvement might also partially be attributed to businesses pushing through delayed orders, signalling that there is more certainty about South Africa’s political outlook, Jee-A van der Linde, senior economist at Oxford Economics Africa, says.

South Africa’s seasonally adjusted Absa purchasing managers’ index (PMI) increased by 6.7 points to reach 52.4 in July. Van der Linde says the latest numbers reflect a better start to the third quarter after a dismal May and June.

“What is more, the survey results show that improved domestic and global demand filtered through to stronger factory activity. The business activity and new sales orders indices rose strongly in July to return to expansionary territory for the first time in three months.”

He points out that the July readings for these two indices are notably higher than the averages of the second quarter, which sets up the manufacturing sector for a better third quarter.

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Increasing supplier deliveries

“Meanwhile, the rising supplier deliveries index (inverted) could be due to suppliers struggling to cope with surging orders after months of slow activity. Lastly, the inventories index fell back below the neutral level, while the employment index continues to languish in contractionary territory.”

PMI vaults past the neutral level at the start of Q3 2024:

Source: BER

Van der Linde says the notable increase in the July PMI numbers may mark a turning point for South Africa’s manufacturing sector, which has struggled to gain traction. “The PMI report notes that the ‘wait and see’ approach businesses adopted before the elections has likely ended with businesses having more clarity after the elections and subsequent coalition negotiations.”

He also points out that the index tracking expected business conditions in six months’ time rose to 69.4 in July from 68.1 in June, signalling that respondents are now the most upbeat about future business conditions since early 2022.

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Can the momentum be sustained?

“The question now is whether this positive momentum can be sustained going forward. Although supply-side constraints have eased in recent months, conditions remain far from ideal. We are cautiously optimistic that demand will improve gradually throughout the second half of 2024 which should translate into stronger economic activity. Our base case is for real GDP to grow by 0.75% in 2024, averaging around 1.7% per year over the next five years.

The headline manufacturing PMI started Q3 on the front foot after averaging 48 in H1 2024

Source: BER