December PMI inches lower due to slower activity

14 January 2015

The seasonally adjusted Kagiso PURCHASING MANAGERS’ INDEX™ (PMI™) declined by 3.3 index points in December but still managed to close 2014 marginally above the neutral 50-point mark at 50.2. During the second and third quarters of 2014, the PMI languished below 50, with the average reading for the fourth quarter coming in at 51.2 index points compared to an average of 48.2 for the first nine months of the year. According to Abdul Davids, Head of Research at Kagiso Asset Management, this confirms earlier expectations that the final quarter of the year will likely be the best quarter of 2014 for actual quarter-on-quarter manufacturing production growth.

The two biggest weighted subcomponents of the headline PMI, the business activity index and the new sales order index, both declined in December. After rising substantially in November, the business activity index dropped by a hefty 7.7 points, which brought the indicator back to below the neutral 50-point mark. “This suggests that output is failing to gain traction despite a normalisation of domestic demand conditions after protracted strikes in the platinum and steel manufacturing sectors earlier in 2014,” Davids says. The magnitude of the decline was surprising but this was possibly due to electricity load shedding and mandatory cutbacks by large industrial users of Eskom.

The new sales orders index fell to 52.6 from 55 index points in November. Davids noted that the global environment was not supportive of strong external demand, reflected in the December Eurozone manufacturing PMI, which remained subdued at 50.6 index points. In China, readings confirmed the fragility of demand as the official PMI estimate slipped to 50.1.

As expected, the price index moderated for a third consecutive month, falling to its lowest level since July 2012 and suggesting a significant slowdown in the rate of input cost increases. This moderation was mainly due to the sharp drop in the international oil price, according to Davids. Encouragingly, the index measuring expected business conditions in six months’ time recovered from a slump in November, and the PMI leading indicator edged above 1 for the first time in 2014, suggesting an acceleration in production going forward as new sales marginally outstripped current inventories.