PMI improves, but economic output hurt by rolling blackouts

The seasonally adjusted Absa Purchasing Managers’ Index (PMI) improved slightly in April, but not enough thanks to intense rolling blackouts that hurt output.

The index increased to 49.8 index points from 48.1 in March.

Despite the improvement, the PMI failed to get above the neutral 50-point mark as business activity and new sales orders worsened compared to March. According to the Bureau for Economic Research (BER) that conducts the survey, the headline PMI would have deteriorated further if there was not such a significant improvement in the inventories index.

“The underlying survey results suggest that the sector experienced another tough month at the start of the second quarter amid intense load-shedding hurting output and demand remaining under pressure,” the BER says.

The PMI is an economic activity index based on a monthly survey conducted by the BER and sponsored by Absa among a representative group of purchasing managers in the South African manufacturing sector.

While the inventories index surged to its highest level since mid-2022 in April, the BER says although it would caution against reading too much into a single month’s movement, the rapid increase in stock levels for materials and goods used in production could have been caused by improved deliveries of goods on the back of better working supply chains.

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Weaker demand due to rolling blackouts

Weaker demand for final goods or disruptions to the production process due to rolling blackouts could also have resulted in higher inventories of input products. “Indeed, business activity (output) edged lower in April to 47.6 index points. New sales orders moved down more decidedly than output and reached the worst level since September 2022, declining 44.3 from 48.5 in March.

It is also important to find out what purchasing managers expect in the future and the news is not good: they only see a marginal improvement in future business conditions, with the index tracking expected business conditions in six months’ time decreasing from 55.5 in March to 51 in April.

“The expectation of a harsh winter ahead regarding rolling blackouts and uncertainty about the strength of global demand, with the manufacturing sector in major European trading partners under pressure, likely depressed expectations,” the BER says.

Potential good news for the sector is that reduced pressure on costs can be expected for the rest of the year. After a sharp increase in February, the purchasing price index decreased for a second month in April.

“Input prices are unlikely to decrease, but the rapid pace of annual cost increases producers had to deal with through 2022 is set to become much less intense through the rest of 2023. The notable exception is set to be mitigation costs for rolling blackouts, such as powering diesel generators.”

The business activity index had a poor start to the second quarter of 2023, with the current level more or less in line with the fourth quarter of 2022 average when the sector contracted and decreased gross domestic product (GDP) growth. Respondents again referred to rolling blackouts hurting production but sustained weaker orders likely also weighed on output.

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Slow start to second quarter of 2023

The new sales orders index was just below the neutral 50-point mark since the beginning of the year and moved down even further at the start of the second quarter and export sales remained in positive terrain but weakened compared to February and March.

The employment index stayed unchanged at 45.4 and the BER says it is unlikely we will see a marked improvement in staffing levels without a sustained rise in production and demand.

The supplier deliveries index increased slightly in April but stayed at a relatively low level compared to readings since the onset of the pandemic, probably due to global supply chains picking up and resulting in faster deliveries of raw materials and intermediate goods.

After a sharp increase in February, the purchasing price index decreased for a second month. The decline in the diesel price at the start of the month, with a further drop expected, likely helped to alleviate some of the upward pressure on costs.

Jee-A van der Linde, senior economist at Oxford Economics Africa, says a dull domestic economic outlook remains the order of the day, with the latest factory data pointing to a slow start to the second quarter.

“The unprecedented scale of power outages means the economy is unable to produce any meaningful growth in the near term. That said, 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 0.6% this year, with risks firmly skewed to the downside.”