Marked decline in business activity illustrates true cost of loadshedding

The true cost of loadshedding is represented by a further decline in the seasonally adjusted Absa Purchasing Managers’ Index (PMI), which indicates another tough start for the manufacturing sector after a weak second quarter, with the headline index falling from 52.2 points in June to 47.6 in July.

PMI indicates the health of the manufacturing sector in the economy and is often a useful substitute for gross domestic product (GDP), because monthly PMI releases sometimes give a better snapshot of the economy than quarterly GDP figures.

When the PMI is 50, it means that the sector has not changed when compared to the previous month. Therefore, if PMI is more than 50, the sector expanded and if it is less than 50, the sector has contracted. This PMI is based on a survey conducted by the Bureau for Economic Research (BER) at Stellenbosch University and sponsored by Absa.

According to Lisette IJssel de Schepper, senior economist at the BER, this is the first reading below the neutral 50-point threshold since July last year, when the looting and unrest in KwaZulu-Natal and Gauteng affected manufacturing output.

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Loadshedding issues

This time it is electricity supply disruptions that were the likely cause of the drop in production, but at the same time the international environment also had low PMI readings in many developed countries.

However, the cost of loadshedding is clear.

“Local purchasing managers became more negative about future business conditions while facing the cost of loadshedding and concerns about global growth. The index tracking expected business conditions in six months’ time dipped to 49.4 in July, the first time since the second quarter of 2020, when the strictest phase of South Africa’s lockdown was in place and respondents expected conditions to worsen.”

Lisette IJssel de Schepper

However, she points out, the vast majority of responses were received before President Cyril Ramaphosa announced significant energy market reforms last week to cut the cost of loadshedding.

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Less business activity – the cost of loadshedding

The decrease in business activity and fewer new sales orders in July 2022 were the big drivers of the decline in the headline PMI, with business activity and new sales deep in negative terrain, pointing towards weak domestic activity and demand.

According to the PMI, export sales were also lower and the employment index decreased, while inventories and supplier deliveries stayed above 50, returning to levels in line with those seen in May.

The purchasing price index signalled the slowest pace of cost increases since the beginning of the year, but the index remains high. However, it does show price pressure at the start of the production pipeline probably peaked earlier this year, which would be consistent with producer and consumer price inflation moving higher in the next several months before it is expected to slow towards the end of the year.

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No strong rebound

On an annual basis, production may look better compared to the weak July 2021 reading, when production was distorted due to widespread looting and unrest, but IJssel de Schepper says the sharp decline in the business activity index does not show a strong quarter-on-quarter rebound following an expected decline in Q2.

“Electricity supply disruptions amid intense loadshedding at the start of the month was likely a key drag on output, with some respondents also mentioning output losses caused by cable theft.”

After a solid second quarter, the employment index dipped back below the neutral 50-point mark in July, but it was less pronounced than the sharp decline in activity. The inventories index remained volatile and bounced back to May’s level.

IJssel de Schepper says despite the recent volatility, the index in general has averaged much higher than in recent years. Sustained supply chain friction may have led manufacturers to stock up on input products in order to alleviate possible production disruptions.

ALSO READ: Transport and logistics on the mend, but load shedding, inflation still hurting economy

Supplier deliveries

The Index also indicates that after a surge higher in June, the supplier deliveries index returned to May’s level, suggesting that supply chains are working somewhat smoother compared to the previous month, in line with the global experience.

“While problematic logistics and supply chains were still flagged in the responses, it featured less than in previous months. However, this could also be due to a decline in demand for inputs, which speeds up delivery.”

The purchasing price index signals the slowest pace of cost increases since the start of the year but remains high compared to the long-term series history, which means cost pressures remain elevated, although it does show pressure at the start of the production pipeline likely peaked earlier this year.

“This would be consistent with producer (which tracks factory gate prices unlike the PMI index which looks at input costs for factories) and consumer price inflation moving higher in the next several months before an expected slowdown in the rate of increase towards the end of the year/early-2023, IJssel de Schepper says.