03 September 2022

Following a rebound in August, the seasonally adjusted Absa Purchasing Managers’ Index (PMI) once again declined in September. The index fell to 48.2, from 52.1 in August and averaged 49.3 points in Q3. More intense load-shedding during the month was likely to blame for the decline relative to August. Indeed, the business activity index plummeted to 38.5 points, from 50.6 in August, with some respondents citing electricity supply disruptions as the cause for the decline in production. At 43, the average for the business activity index in Q3 is well below the neutral 50-point mark and even below the Q2 average (45). This underscores the serious constraint that load-shedding, at elevated stages, puts on activity growth. Even if it does not have a direct impact on curtailing output, some respondents flagged that load-shedding weighs on demand for their products due to lower activity elsewhere. Speaking of demand, the new sales orders index fell sharply from 48.6 in August to 40 in September. In addition to subdued domestic demand, the weakening external environment, reflected in the fourth consecutive decline in the export index, likely also contributed to the decline in orders. Respondents also turned less optimistic about business conditions going forward. The index tracking expected business conditions in six months’ time fell back to 51.2 from 57.9 in August and an average of 61.5 in the first six months of the year. Concerns about the persistence of load-shedding, the health of the global economy and perhaps the lingering impacts of higher borrowing costs likely affected sentiment.

Overall, the PMI results do not bode well for a strong recovery in actual manufacturing production from a bleak Q2. However, a normalisation in conditions from the (temporary) shocks weighing on output in Q2 – particularly in the automotive production value chain – should aid production. This means that the sector is unlikely to perform as poorly as in Q2, but that a strong rebound also seems unlikely. It must be added that manufacturing production should post modest year-on-year growth in 2022 Q3 after output was negatively affected by relatively strict lockdown restrictions and the looting and civil unrest in July 2021.

The purchasing price index continued to signal that cost pressures are cooling. The index moved lower for a third straight month to reach the lowest level since July last year. Statistics South Africa’s official producer price inflation figure for final manufactured goods also ticked down (in August), with the PMI price index pointing to a further deceleration in September. This suggests that pipeline price pressure has probably peaked, although it remains at elevated levels. The recent weakness of the rand exchange rate (versus the US dollar) poses the biggest risk to a continuation of this encouraging trend over the near term.