Did PMI turn the corner back to positive territory in September?

South Africa’s manufacturing Purchasing Managers’ Index (PMI) increased sharply in September at the end of the third quarter, driven by improvements across the subcomponents, thanks to increasing demand although it has been volatile lately.

According to the Burau for Economic Research (BER), the seasonally adjusted Absa PMI increased to 52.8 points in September, up from 43.6 in August.

Although the PMI and official manufacturing data have been volatile in recent months, the BER says it is useful to note that September takes the average PMI for the third quarter to 49.6 points, just below the 50-point mark after average PMIs of 47.9 for the second quarter and 48.2 for the first quarter.

This is a positive sign for the sector, the BER says. “Even more encouraging is that the index tracking expected business conditions in six months’ time increased to 70.8 points in September from 61.3 in August, the highest index since January 2021 (71.3), indicating strong optimism about improving business conditions.”

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Business activity increased, welcome improvement in employment

The business activity index increased by 11.8 points to 50.7 and in line, new sales orders increased by 18.5 to 53.1 points in September. Domestic as well as export demand showed signs of improvement, with exports back on the expansionary side, as in July and increasing for a third month in 2024.

The BER says on the local consumer front, the recent interest rate cut adds to the expectation of a possible more positive demand story going forward.

The index measuring supplier performance decreased by 2.5 points, indicating an improvement, as this index is inversed. This could, encouragingly, mean that even with the big jump in activity and sales orders, suppliers are adjusting and coping with the increase, the BER says.

There was also a welcome improvement in the employment index which gained 6.8 points, taking the sub-index to 48.9 in September. However, the BER cautions that it still remains in contractionary terrain.

“Volatility in the manufacturing sector in recent months means that manufacturers were careful with employment decisions. Looking ahead, a sustained improvement in production is likely required before job growth moves into positive terrain.”

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Good feeling about inflation too

While the latest official data shows that producer price inflation for final manufactured products edged down to 2.8% in August, below 3% for the first time in four years, the PMI survey is positive for the inflation outlook, with the purchasing price index decreasing to 61 points.

This is the lowest reading for the year and since March 2018 when it was 60.7. With a relatively stronger currency and declining crude oil prices, fuel price cuts in September supported the softening of production costs, the BER says.

“The latest survey results show that demand is rising, which bodes well for South Africa’s manufacturing performance. However, the PMI has been volatile lately and it remains to be seen whether this improvement will be sustained over the coming months.”

The manufacturing PMI averaged 49.6 in Q3 2024, higher than in recent quarters, as this graph shows:

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Struggling sector may have turned a corner

Jee-A van der Linde, senior economist at Oxford Economics Africa, says although the latest PMI data continues to reflect high volatility in the South African manufacturing sector, the results align with their view that the struggling sector may have turned a corner.

“Easing supply-side constraints, lower fuel prices and interest rate cuts suggest that demand conditions will improve further in the second half of the year, which should translate into stronger economic activity.

“Overall, economic growth was sluggish in the first half of 2024, but the outlook has improved since the elections in May. Our base case is for South Africa’s real gross domestic product (GDP) to expand by 1.0% in 2024 and reaching 1.7% next year thanks to improved post-election growth prospects.”

This table shows that headline manufacturing PMI ended the third quarter on the front foot, with improvement across the board in September: