PMI continues to signal manufacturing sector's subpar performance

01 August 2014

The seasonally adjusted Kagiso PURCHASING MANAGERS’ INDEX™ (PMI™) fell to 45.9 index points in July from 46.6 in June. The index has now been in contraction for four consecutive months.

“The decline in July was expected given that the labour strike by the National Union of Metalworkers of South Africa (Numsa) lasted almost the full month and directly affected many manufacturing subsectors,” says Abdul Davids, Head of Research at Kagiso Asset Management. He points out that the manufacturing sector’s subpar performance during the past few months is largely a direct result of labour strikes in the platinum mining as well as the steel and engineering sectors. “Given that these issues, for the most part, have now been resolved and production should ramp up in coming weeks, the sector should recover during the remainder of the year,” Davids adds.

The Business Activity Index fell to 39.4 points in July, its lowest level in three years. “While the Index has been weak for a while, conditions worsened in July as the Numsa strike forced some producers, including large vehicle manufacturers, to halt production due to supply disruptions,” Davids points out.

With activity levels remaining low, the Employment Index deteriorated to 43.9 points in July. According to Statistics South Africa’s Quarterly Labour Force Survey, 41 000 jobs were lost in the manufacturing sector during the second quarter of 2014.

Although the New Sales Orders Index increased marginally to 45.4, it remains at a dismal level. Davids says that order volumes could recover in coming months if local demand picks up after the strike-related disruptions, further supported by the improving international environment.

The Price Index rose to 76.5 points, partially due to the substantial petrol and diesel price increases in July. “While the rand did strengthen somewhat during the second half of July, the sustained weak level may have placed further upward pressure on the costs of imported input products,” says Davids. “While recent lower international oil prices could alleviate some price pressure, the double-digit wage settlements could push up costs significantly.”