Manufacturing PMI sinks to lowest level since July 2021

South Africa’s manufacturing purchasing managers’ index (PMI)for July has dropped further to its lowest level since July 2021 when devastating riots and looting shook the economy.

The July PMI reading of 47.3 sets a depressed starting point for the third quarter and considering widespread impediments to economic growth, a meaningful turnaround seems unlikely.

The latest seasonally adjusted Absa Purchasing Managers’ Index indicates that, after what seems to have been a decent second quarter at least in terms of quarterly growth momentum, the manufacturing sector had a setback at the start of the third quarter.

Latest PMI

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

Although the headline index was only marginally lower in July at 47.3 index points from 47.6 in June, this stability masks substantial changes in some of the major PMI subcomponents.

The manufacturing purchasing managers’ index (PMI) has now declined for the sixth month in a row and plunged sharply at the start of the second half of the year.

The reason for the decline in business activity can partly be attributed to the ramp-up of rolling blackouts in July, economic research group, Oxford Economics Africa, says.

“What’s more, a notable rise in the supplier deliveries index suggests that supply chain issues relating to the transport disruptions on the N3 corridor through the month of July might also explain the large fall in business activity.”

ALSO READ: Absa PMI drops again – shows strain on SA economy

Business activity in PMI tanked

In a particularly stark move, the seasonally adjusted business activity index tanked by almost 11 points.

Besides a ramp-up of load shedding intensity in July after the unexpected reprieve in June, it is not immediately clear what drove the large decline but a substantial rise in the supplier deliveries index to the highest level so far this year may provide some clues.

The deliveries index is inverted, implying longer supplier delivery (lead) times boost the headline PMI.

Pre-Covid, longer delivery times were mostly associated with robust demand conditions or reflecting manufacturing sector strength.

However, as was the case during the worst of the pandemic, supply chain disruptions can also lengthen delivery times without any increase in demand.

The PMI new sales orders index moved lower in July and therefore, there is most likely some other explanation for the jump in supplier delivery times, as it was not demand driven.

The longer delivery times in July may well reflect delays associated with the torching of multiple trucks on the N3 transport corridor during the month.

If this is the case, the headline PMI was kept artificially afloat in July by the meaningful rise in the supplier deliveries index.

In the same breath, to the extent that transport delays contributed to the decline in business activity during July, activity should recover in August, at least partially.

The sharp moves in the activity and supplier delivery indices may be due to once-off events and if this is the case, the PMI components highlight the debilitating impact that the kind of disruptions seen in July can have on production processes.

ALSO READ: Trade balance dipped unexpectedly in June

A positive note in the PMI

On a more positive note, the PMI price index moved down notably in July, signalling that the meaningful moderation in the annual rate of increase for the producer price index (PPI) in recent months still has some legs.

Oxford Economics Africa says this bodes well for further disinflation at South African factory gates. PPI inflation dropped to 4.8% in June 2023 and is now at its lowest point since March 2021, when it was recorded at 5.2%.

“This points to an easing in production cost pressures, which is positive news for South Africa’s future consumer price inflation rate.

In fact, the headline PPI inflation rate in June dropped below the annual CPI inflation rate for the first time since December 2020.”

The group says forward-looking factory data suggests continued strain for South Africa’s economy due to the same factors that have been dogging the economy down since the start of the year.

These factors remain in full force heading into the second half of the year, but domestic demand is likely to be softer compared to the first half amid restrictive monetary policy, while foreign demand for South African manufactured goods is waning.

Seasonally adjusted manufacturing output decreased in May and the second quarter’s PMI average points to a sectoral contraction with the weak start to the third quarter suggesting the outlook for the second half is not any brighter.