The seasonally adjusted Absa Purchasing Managers’ Index (PMI) declined from a solid 51.5 points recorded in July to 43.4 in August. This is the lowest level in just over a year. The deterioration was driven by sharp declines in the new sales orders index as well as the business activity index. However, inventories and supplier deliveries came in above the neutral 50-point mark in August, which provided some support to the headline PMI. Overall, the average level of the PMI recorded during the first two months of the third quarter was 47.5, which is below the neutral 50-point mark and two points below the average recorded in the second quarter.

The decline in the new sales orders index seems to be driven by renewed weakness in domestic demand as respondents were more positive on exports compared to the previous month. The deterioration in demand contributed to a fall in output, as reflected in a big decline in the business activity index. This, in turn, weighed on the employment index which fell back below the neutral 50-point mark after a positive outcome in July.

The significant declines in August are surprising as it is hard to imagine that the underlying economic conditions deteriorated as rapidly as reflected by the main PMI subcomponents. Strictly speaking, the PMI is not a sentiment indicator as it gauges activity levels, but the responses of purchasing managers may have been influenced by the further ratcheting up of the land debate during the past month. The PMI has also been fairly volatile in recent times. Therefore, at least another couple of readings are required before any strong conclusions can be drawn from this data, including whether the PMI’s move above 50 in July was a temporary blip.

Worryingly, purchasing managers turned even more downbeat about expected conditions going forward. The index tracking expected business conditions in six months’ time declined for a sixth consecutive month to reach 44.6 in August. This is the lowest level since early 2016. The fact that a further deterioration is expected from the bleak picture of current conditions, as reflected by the August PMI survey, is very concerning. The PMI’s leading indicator also moved back below one, with inventories outstripping sales orders, which usually does not bode well for manufacturing output going forward