PMI up in December, but SA’s business activity gets even worse

The Purchasing Managers’ Index (PMI) has increased for a third month to reach 53.1 index points in December, but South Africa’s business activity index deteriorated further, which is most concerning.

The seasonally adjusted PMI increased slightly from 52.6 in November and while the headline number is positive, the underlying picture is more mixed, especially regarding the business activity index which indicates weak underlying momentum in the sector.

The business activity index ended 2022 on a weak level and failed to rise above the neutral 50-point mark through the year after the first three months, with intense load shedding contributing to the weakness in output.

However, the sustained demand growth signalled by the new sales orders index was more encouraging although it decreased slightly from November, but remained firmly above the 50-point mark for a second month.

What is the PMI?

The PMI is an economic activity index based on a survey conducted monthly by the Bureau for Economic Research (BER) and sponsored by Absa among a representative group of purchasing managers in the South African manufacturing sector. A value of 50 indicates no change in the activity, a value above 50 indicates increased activity and a value below 50 indicates decreased activity.

The headline PMI is calculated as the weighted average of business activity (0.20), new orders (0.20), employment (0.20), supplier deliveries (0.20) and inventories (0.20).

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Increase in expected business conditions index

According to BER, a further positive development was an increase in the expected business conditions index that indicates that purchasing managers became more optimistic about business conditions in six months, with the index rising to 54.9 in December from 51.7 in November, probably underpinned by the expectation that the peak in cost pressure is for now behind manufacturers.

The purchasing price index decreased to its lowest level since late 2019 and is now even well below its long-term average reading, with the significantly lower average Brent Crude oil price and slightly stronger Rand exchange rate relative to November possibly driving the alleviation of cost pressure, BER says.

“The steep downturn in the PMI price index at the end of the year bodes well for a further moderation in actual producer price inflation in the first months of 2023.”

BER is also worried about the renewed increase in the supplier deliveries index, saying with new sales orders dipping somewhat, this could point to renewed friction in supply chains rather than strong demand causing a lengthening in delivery times.

The index is inverted and, therefore, slower deliveries, often caused by higher demand for goods, causes the index to increase. Further near-term global supply chain disruptions are possible after the rapid reopening of the Chinese economy resulted in surging Covid-19 infections.

The employment index shot up by 8.6 points in December and while any indication of an increase in staffing levels is encouraging, BER says there have been temporary increases in the index before that did not correspond with sustained manufacturing employment growth in the official data.

“Indeed, given that activity remained poor, it is unlikely that actual employment will improve to this extent on a sustained basis.”

The inventories index declined well below its firm 51.9 where it has been since mid-2021 to 46.3 and BER says, as with the employment index, we will have to wait and see how this develops over the next few months as it could also be related to slower supplier delivery times.

ALSO READ: SA factory activity improves but Transnet, load shedding challenges persist

Headline PMI not painting full picture

Economic research group, Oxford Economics Africa, says South Africa’s manufacturing industry endured a particularly tumultuous period in 2022, characterised by the intense power outages, high input costs, infrastructure damage and disruptions owing to strikes and inefficiencies at parastatals.

“The increase in the headline PMI does not paint the full picture as the subcomponents point to depressed business activity. That said, the fact that the new sales orders index stayed above 50 points for another month, is a positive sign.”

The group says the South African economy avoided a recession in 2022 after real gross domestic product (GDP) growth came in better than expect in the third quarter and the group revised its 2022 real GDP growth estimate higher to 2.3% and left the 2023 growth forecast unchanged at 1.0%.

“A weakened global growth outlook, domestic sectoral inefficiencies together with persistent power outages will lead to lower economic growth this year,” the group says.