1 April 2020

During the first quarter of 2020, the seasonally adjusted Absa Purchasing Managers’ Index (PMI) experienced the weakest quarterly performance since 2009. The PMI averaged at 45.9 index points, compared to 47.6 in the fourth quarter of 2019. The weak quarterly outcome was despite the PMI improving to 48.1 index points in March from 44.3 index points in February. Nonetheless, the PMI still remained in contractionary terrain for a fourteenth straight month.

The PMI was, to some extent, lifted by the supplier deliveries subindex moving higher in March, reflecting slower delivery times. In normal circumstances, a slowdown in supplier deliveries is seen as positive for the sector as it suggests suppliers are busier. However, in this case, the slowdown in delivery times is caused by global supply-chain disruptions. This phenomenon is observed in PMIs worldwide, but amplified in the South African manufacturing PMI as this component has a bigger weighting (as the subindex brings much-needed stability to the headline PMI and results in a better correlation with official manufacturing output figures in normal times). Without the inadvertent boost from supplier deliveries, the headline PMI would have turned out lower in March.

With this in mind, it is better to look at some of the PMI subcomponents that may provide a further indication of the current underlying conditions in the factory sector. Indeed, the business activity and new sales orders indices lingered around 11-year low levels in March. The nationwide lockdown imposed towards the end of March meant that most factories lost three working days compared to a normal March, while the 21-day lockdown will result in 10 working days lost in April.

Supply-chain disruptions mean that production is also not expected to return to full capacity immediately after the lockdown lifts. This suggests that the April factory figures will likely show a deep contraction. An extension of the lockdown is likely to result in some factories having to close permanently. This will have a sustained negative impact on production and could also result in further job losses in the sector. Indeed, respondents turned very pessimistic about expected business conditions going forward.

The index tracking expected business conditions in six months’ time fell to 29.1 index points in March. This is below the lowest reading recorded during the 2008/09 recession and, in fact, the lowest level on record (series since 1999). This means that the worst is yet to come for the manufacturing sector.