The seasonally adjusted Absa Purchasing Managers’ Index (PMI) declined to 46.7 index points in June 2017 from 51.5 in May. The deterioration was broad based with four of the five main subcomponents moving lower compared to May. The recent volatility is probably driven, or at least exacerbated, by continued uncertainty about the outlook for the domestic economy. The uncertainty likely results in more erratic (domestic) orders, which can filter through to more volatile output patterns on a month-to-month basis.
Several domestic data releases, such as the economy having entered a technical recession and business confidence plunging to recession-low levels, as well as continued uncertainty on the political front during the month, likely explain why respondents were notably more pessimistic about business conditions going forward. In addition, the manufacturing sector is also bracing itself for a possible strike in the steel and engineering sectors if a wage agreement is not reached soon. As such, the index tracking expected business conditions in six months’ time fell from 61.4 to 50.0 in June. This is the lowest level since February 2016.
While the PMI paints a subdued picture of conditions in the sector, the purchasing price index indicates that manufacturers at least reported a deceleration of cost pressures. The price index declined by 7 points to reach 61.3 index points in June, the lowest level since October 2016.
The decline came on the back of an (on average) almost $4 (per barrel) drop in the Brent crude oil price as well as the stronger rand exchange rate which traded below R13/$ for most of the month. The stronger rand lowers the cost of imports of raw materials and intermediate goods used in the local production process. The notable fuel price decline effective from Wednesday may lead to a further deceleration of upward cost pressures.