PMI down slightly, but optimism still below average

The Absa Purchasing Managers’ Index (PMI) ticked down slightly in March to 48.1 from 48.8 in February, but purchase managers, who are the respondents, became more optimistic about future business conditions, although it is still below the long-term average of the index, which implies that businesses are less optimistic than usual.

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

After a solid start to the year, this was the second straight month that the index indicated a deterioration in business conditions in the manufacturing sector.

But according to the Bureau for Economic Research (BER), the output could improve from the quarterly contraction of the fourth quarter of 2022 considering the performance of the business activity index during the entire first quarter.

However, domestic demand seems to be struggling, with some comments from respondents referring to local demand faltering due to load shedding.

“Indeed, in contrast to business activity, the new sales orders index performed worse relative to the fourth quarter despite the PMI’s index tracking export sales performing well during the first quarter and rising to an almost two-year high in March.”

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Delivery times normalising

The BER says the index also shows a further sign that delivery times are normalising with the supplier deliveries index recording another steep decline to reach 50.8, the lowest level since the start of the pandemic.

“This is likely partly due to less constrained global supply chains, a trend also reflected in some international PMI surveys. This is a positive development for the sector but on the negative side, sustained weak demand likely also explains some of the recent downward move in South Africa.”

The slight decline in the purchasing price index in March happened despite a slight increase in the diesel price at the start of the month and a weaker rand exchange rate compared to February.

The BER says less intense rolling blackouts during the second half of March would have helped to decrease the costs of running diesel generators.

The results also show that respondents were more optimistic about business conditions going forward.

“After a sharp deterioration in February, the index tracking expected business conditions in six months’ time rose to 55.5 from 46.8 in February, indicating that purchasing managers generally expect conditions to look better later this year.

“However, the long-term average of this index is well above the current reading, suggesting less optimism than usual,” the BER says.

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Business activity index

The business activity index increased a bit after a sharp decline in February, and thanks to a strong start to the year, the average for the business activity index is about 2 points higher than in the fourth quarter, suggesting that manufacturing output may improve in the first quarter.

However, the new sales orders index had a worse quarter compared to the fourth quarter, with the index pointing to declining demand throughout the entire quarter.

The BER says some comments refer to local demand struggling due to load shedding, but encouragingly, the PMI’s index tracking export sales performed well throughout the first quarter and rose to an almost 2-year high in March.

The employment index fell for a third consecutive month to 45.4 in March. According to the latest jobs data (QES) from Statistics South Africa, the level of formal employment in the sector barely changed through 2022 and the recent PMI data does not indicate an improvement in job growth during 2023.

The inventories index also failed to recover most of February’s losses and remained stuck below the neutral 50-point mark for a second month.

The supplier deliveries index also recorded another steep decline to reach 50.8, the lowest level since the start of the pandemic, likely partly due to less constrained global supply chains resulting in faster delivery times, a trend also reflected in some international surveys.

“This is a positive development for the sector. However, on the negative side, sustained weak demand likely also explains some of the recent downward move in SA because the index is inverted. Pre-COVID, when supply chain issues did not have such a bearing on the index, faster deliveries tended to be accompanied by weak demand conditions. Faster deliveries were seen as an adverse development and reflected in a decline of the index that subtracted from the headline PMI.”

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Dull domestic outlook

Economic research group, Oxford Economics Africa, says despite more optimism, the latest reading remains below the long-term average of the index.

“A dull domestic economic outlook appears to be the order of the day, amid an uncertain and increasingly challenging business environment.

“South Africa is experiencing an unprecedented scale of power outages, which is not conducive to economic growth. However, the economy avoided a recession in 2022 and it continues to stage an uneven and gradual post-pandemic recovery. We forecast GDP growth to come in at 0.7% this year, with risks firmly skewed to the downside.”