PMI declines further, bad news for third quarter GDP

The Purchasing Managers’ Index (PMI) declined by 4.3 points to 45.4 in September, which bodes ill for Gross Domestic Product (GDP) growth in the third quarter, while supply disruption kept the reading artificially elevated. Rolling blackouts also contributed to reduced business activity.

The PMI measures prevailing economic trends in manufacturing through a survey conducted by the Bureau for Economic Research (BER) and sponsored by Absa.

The BER says the decline was driven by very weak demand and constrained production. Weak demand was demonstrated by an outsized decline in September of more than 10 index points in the new sales orders index, which fell back to a level last seen in mid-2021.

“External and domestic demand for South African manufactured goods seems to have been under pressure, with the export index hit hard in September. This most likely reflects the weakening growth momentum in the Eurozone and the UK, both key export markets for local manufacturers,” the BER says.

On the domestic front, restrictive borrowing costs and perhaps also the sharp fuel price hikes at the beginning of September weighed on demand, the bureau says, adding that it was also a poor month for production as the PMI business activity index tanked 8.1 points to 41.9.

“This index was extremely volatile in the third quarter. Compared to August, there was a step-up in load shedding during September. Along with poor demand conditions, this may help to explain the low level of activity during the month.”

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Business activity index also down

The business activity index averaged 43.3 for the entire third quarter, down from an average of 48.1 in the second quarter. The BER says the decrease is consistent with a quarterly contraction in actual manufacturing output and if this materialises, it will weigh on overall GDP growth momentum in the third quarter.

The PMI purchasing price index increased for the second month in a row in line with sustained rand weakness and higher international oil prices during the past month. Another significant diesel price increase is on the cards for October.

Despite all this bad news, the BER says purchasing managers do not expect the tough trading conditions to persist, with the index measuring expected business conditions in six months increasing to 55.6, the highest level since March.

Jacques Nel, head of Africa Macro at economic research group, Oxford Economics Africa, says the fact that demand conditions are undoubtedly weak means the supplier deliveries index is being artificially boosted by supply disruptions.

These disruptions include the lingering impact after trucks were torched on the N3 highway in July and the Western Cape taxi strike in August.

“Demand conditions at home and abroad remain unfavourable due to elevated borrowing costs and the aftermath of cost-of-living crises. South African consumers and businesses also experienced an increase in intermittent power outages in September.”

ALSO READ: Manufacturing PMI sinks to lowest level since July 2021

New sales orders index took a thumping

New sales orders index took a thumping: dropping more than 10 points to 35.3. The employment index remained deep in contractionary territory, improving only slightly from 42.8 in August to 43.8 in September.

In turn, the purchasing price index moved higher for the second consecutive month, coming in at 67.2 most recently.

Nel says it is concerning that the supplier deliveries index remained at a lofty 62.0 in September, up slightly from 61.9 in August.

“The fact that supply disruptions are boosting a salient subcomponent indicates that business conditions in the manufacturing sector are even less favourable than the latest 45.4 PMI reading suggests.

“Despite the boost afforded by supply-side constraints, the overall PMI still dropped on a quarterly basis in the third quarter, indicating the manufacturing sector could be a drag on GDP growth in the third quarter,” Nel says.