Poor start for economic activity in fourth quarter – Absa PMI

The Absa PMI for October indicates a weak beginning for the fourth quarter. It ended the third quarter on a negative note. The business activity index was the main issue, dropping by 2.8 points to a low 40.3. This is similar to the July 2023 level when disruptions on the N3 transport corridor likely caused input shortages.

The 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. A value above 50 indicates increased activity and a value below 50 indicates decreased activity.

Given that the frequency and intensity of load shedding eased notably in October, the weak performance from the activity index is perplexing, Lisette IJssel de Schepper, senior economist at the BER, says.

The headline index dropped further to 45.4 index points in October, from an upwardly revised 46.21 during September. Although it is not clear why activity declined further in October, this corresponds with sustained weak readings on demand.

De Schepper points out that despite a minor increase, the PMI new sales orders index remained below 40 index points for the second consecutive month at 39.7.

“With the PMI export index performing better in October, the sustained weaker level for new sales orders largely reflects weak domestic demand for manufactured goods, she says.

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High prices and interest depressing demand for local manufactured goods

“On the consumer front, elevated relative (food and fuel) prices, as well as restrictive borrowing costs, are depressing demand for local manufactured goods. Regarding industrial demand, constrained mining output amid soft coal and platinum group metal prices, as well as failing railway and port efficiencies, may help to explain the lacklustre PMI production indicator.”

The expectations of purchasing managers also deteriorated sharply in October, with the index measuring expected business conditions in six months declining by more than 12 points to 43.4.

De Schepper says with key units of the Kusile power station resuming operations earlier than expected and the associated reduced load shedding in October, adverse global events seem to have driven the poor expectations reading.

“Besides poor activity data in the Eurozone and the UK, major SA export markets, one can add the outbreak of war between Israel and Hamas in October. The expectations reading also declined sharply in February 2022, when Russia invaded Ukraine.”

The business activity index performed even worse in October after losing plenty of ground in September. De Schepper says as the ability to produce presumably improved as the frequency and intensity of load shedding eased, the weak activity reading most likely reflects continued strained demand conditions in SA.

“The pressure on household finances and soft mining output may be amongst the key reasons why the demand for locally produced manufactured goods is faltering. The new sales orders index ticked up somewhat in October but remained below 40. The level of the index is indicative of weak underlying demand for manufactured goods.”

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PMI: output sagging along with weak demand

With output sagging and given the weak demand conditions, the employment index lost further ground in October. At 41, the index is now hovering around the weakest level since the end of 2021.

De Schepper says this does not bode well for a recovery in actual formal employment in the manufacturing sector during the second half of the year and this is after the sector lost jobs (on a quarter-on-quarter basis in the second quarter.

The inventories index continued to hover around 45 index points in October. The supplier deliveries index remained elevated for the fourth month in a row during October. This index is inverted in the headline PMI index calculation, implying that longer supplier delivery lead times boost the headline PMI.

“The reasoning behind this is that pre-Covid, longer delivery times were mostly associated with robust demand conditions, reflecting manufacturing sector strength. However, as was the case during the worst of the pandemic, supply disruptions can also lengthen delivery times without any rise in demand.”

De Schepper says given the weak PMI demand indicators in recent months, the fact that the supplier delivery index remained high suggests some lingering supply-side issues following disruptions in July with the N3 truck torching, the Western Cape taxi strike in August and the Western Cape floods in September.

There was better news on the price front in October as the PMI purchasing price index eased from an elevated level in September. The decline in domestic fuel costs in early November should provide further near-term input cost relief to manufacturers, she says.