The worst of the recent oil price shock has likely passed, barring any further upsurge in global energy costs.
PMI in July notes that improved domestic demand supported an improvement in production. Picture: iStock
South Africa’s manufacturing sector got off to a weak start in the third quarter, with the Absa Purchasing Managers’ Index (PMI) declining again in July, although improving domestic demand helped boost new orders and supported a modest recovery in factory production.
The index released on Monday showed a decline from 47.3 to 46.8 over the period.
“At first glance, this suggests a weak start to the third quarter. However, the headline decline arguably overstates the weakness in underlying manufacturing conditions. Most notably, domestic demand improved and lifted new sales orders,” read the index.
Manufacturing activity in detail
The Absa PMI is an economic activity index based on a survey by the Bureau for Economic Research (BER), sponsored by Absa, which gauges the health of South Africa’s manufacturing sector.
The July PMI noted that improved domestic demand supported an improvement in production, with the business activity index ticking up for a second consecutive month to 48.8 points.
In the PMI, a score above 50 means manufacturing activity is growing. A score below 50 means activity is shrinking. A score of exactly 50 means no change.
The decline in supplier deliveries also weighed on the headline PMI, but this could be seen as a positive development.
“Because the index is inverted (so faster deliveries mean a lower index), in the recent South African context, a decline could signal some improvement in supply chains,” the index said.
Performance in Durban port, Cape Town harbour
PMI stated that recent data suggest activity in the Durban port is picking up, although Cape Town harbour is still underperforming.
The index noted that the decline in inventories is “more difficult to interpret”. However, it could suggest that purchasing managers remain unconvinced that stronger demand will persist. Although some firms may still be delaying purchases in anticipation of lower input costs.
“Indeed, the index tracking expected business conditions in six months’ time declined to 49.3, down from 56.6 in June. The renewed escalation of tensions in the Middle East, together with higher oil prices following June’s lows, likely contributed to the deterioration in sentiment,” the index said.
“However, the sharp decline also suggests that manufacturers remain cautious about the durability of the recent improvement in activity.”
The worst has passed
PMI showed that the purchasing price index came down in July. According to the index, this suggests that the worst of the recent oil price shock has likely passed, barring any further upsurge in global energy costs.
Even so, input cost pressures remain elevated relative to the pre-war period. However, the increase in diesel prices later this week will put renewed pressure on costs, said the index.
“If recent rand weakness is sustained, that would also put upward pressure on imported goods costs.
“Overall, the July survey paints a somewhat more encouraging picture than the headline PMI suggests. Domestic demand and production continued to recover, while easing cost pressures offered further relief.
“However, subdued confidence, weak export demand and continued inventory drawdowns suggest manufacturers remain cautious about the sustainability of the recovery.”
