Manufacturing business confidence remains low, despite improvement in quarter 3

According to the Absa Manufacturing Survey, manufacturing business confidence improved to reach 30 index points in the third quarter of 2016, up from 23 in the second quarter. At the current level, seven out of ten respondents remain unsatisfied with prevailing business conditions.

The manufacturing sector has been plagued by weak domestic demand conditions for several quarters. However, demand seems to have worsened in the third quarter, with higher net majorities reporting a decline in domestic order and sales volumes. Additional to the decline in order volumes, domestic selling price inflation moderated somewhat, which points to increased pressure on turnover growth.

The export performance was mixed, with sales volumes improving while order volumes came in lower. Manufacturers reported a significant deceleration in the rate of increase in the average export selling price (per unit of production). The turnaround was likely driven by the unexpected strengthening of the rand exchange rate during the first two months of the third quarter (when the survey took place) compared to the second quarter. On a positive note, manufacturers are notably more optimistic about export growth in 12 months’ time.

Amid weak domestic demand and disappointing export orders, the indicator for production volumes remained in negative terrain. In addition, the Barclays Purchasing Managers’ Index (PMI) declined sharply in August to reach 46.3 index points. As a result, the average for July and August (49.4 index points) is just below the neutral 50-point mark. This suggests that output growth is likely to slow in the third quarter compared to the second.

Going forward, manufacturers anticipate an improvement in most of the underlying activity indicators in the fourth quarter and see positive investment growth over the next year.