The seasonally adjusted Absa Purchasing Managers’ Index (PMI) rose to 51.5 index points in July, up from 47.9 in June. The current level is comfortably above the neutral 50-point mark and is supported by four out five of the key subcomponents being in positive terrain. This suggests that the manufacturing sector got off to a good start in the first month of the third quarter of 2018.
The recovery was driven by an improvement in demand, as reflected by the increase in the new sales orders index. The uptick in demand filtered through to higher business activity. In fact, the output index managed to edge above 50 points for the first time since February. This, in turn, contributed to the increase in the employment index. However, the inventories index remained stuck below the neutral 50-point mark in July.
While current conditions seem to have improved, purchasing managers turned very pessimistic about expected conditions going forward (compared to historic levels). The index tracking expected business conditions in six months’ time declined to 48.7 points in July from 55.7 in June. This is the first time since August 2017 that manufacturers expect conditions to deteriorate going forward instead of improving. Part of this is because current conditions are (according to the PMI survey) better than they have been in recent months, so an improvement from this more elevated level may be less likely than from tougher conditions before. Furthermore, prospects for exporters may be more subdued due to concerns about the potential negative impact on global growth from the wave of US trade protectionism.
Manufacturers are also battling with increasing cost pressures. The purchasing price index rose sharply for a second consecutive month and is currently at the highest level since early 2016. A key driver of the recent upward trend has been several straight months of hefty fuel price increases. Fortunately, the fuel price remained virtually unchanged at the start of August. On average, the Brent crude oil price and rand exchange rate stayed broadly the same compared to the previous month.