Ina Opperman

By Ina Opperman

Business Journalist

Manufacturing PMI fell in May despite no load shedding

Many manufacturers indicated that customers put orders on hold pending the election.

South Africa’s manufacturing PMI fell below the neutral 50 level in May, despite the fact that no load shedding was implemented during the month. Overall demand for manufactured goods remained weak and is not expected to improve significantly in the near term.

The seasonally adjusted Absa Purchasing Managers’ Index (PMI) fell below 50 points in May, with the headline PMI decreasing to 43.8 points from 54 points in April. Although there was no load shedding, local power outages remained frequent and the deterioration seems to be driven by a significant drop in demand.

The PMI is an economic activity index based on a survey conducted by the Bureau for Economic Research (BER) and sponsored by Absa.

ALSO READ: Manufacturing PMI shows better start to second quarter

According to the BER numerous respondents said that orders were put on hold as clients waited for the election results. The PMI has been in contractionary territory for three out of five months this year, as the manufacturing sector seems volatile in an election year.

Sharp manufacturing PMI declines

The business activity index declined sharply to 38.1 points in May from 57.2 points in April, although the average for the first two months of the second quarter is better than the first. This points to some improvement from the expected contraction in manufacturing output in the first quarter.

The BER says port delays and global supplier problems in the transport sector contributed to a decline in production but the biggest driver was probably a drop in demand.

The new sales orders index also declined sharply, to 37.8 points in May from 55.6 points in April. Amid sustained high interest rates and low credit extension, domestic demand remained sluggish. The BER says respondents stated that orders are drying up as consumers seem to be focusing on necessities.

Export sales also fell in May, putting further pressure on demand. Supplier problems in Europe affected some of the local manufacturers in the transport sector, as there were delays in the deliveries of the necessary parts used as input in the local market.

ALSO READ: Manufacturing PMI returns to positive territory in February, but prices are a problem

Port issues remain a concern for most local manufacturers, although there was an improvement in supplier deliveries, suggesting that the situation is improving. The supplier deliveries index declined from 57.4 in April to 55.4 in May, indicating shorter delivery times. Negatively, a decline in orders across the sector may have also supported this improvement, the BER points out.

The employment index declined significantly by 5.9 points from 49.4 in April to 43.4 in May as manufacturers seem to be adjusting staff as production and sales are down.

A little good news in manufacturing

However, the results contained some good news, as the index for expected business conditions in six months’ time increased to 57.6 in May from 55.7 in April. The BER says respondents likely hope for a favourable election outcome and a return of “put-on-hold” orders. Manufacturers could also be more upbeat about the global economic recovery, particularly in Europe.

More positive news was that the purchasing price index declined to 66.9 in May from 72.4 points in April, the lowest reading in six months and a second consecutive month of a decline in input prices, reflecting easing cost pressure.

Oil prices have remained relatively low due to sluggish demand in the global markets, which supports the manufacturing industry and the BER says the stronger rand exchange rate through most of the month likely also contributed to softer cost increases.

Latest manufacturing PMI aligns with GDP forecast

Jee-A van der Linde, senior economist at Oxford Economics Africa, says the latest PMI numbers align with their below-consensus real gross domestic product (GDP) growth forecast of 0.7% for 2024.

“Demand conditions remain unfavourable amid sustained high interest rates and ongoing supply-side constraints and are not expected to improve materially in the near term. Although the index for expected business conditions in six months’ time increased marginally during May, the unexpected election results have arguably created more uncertainty.”

ALSO READ: Absa PMI shows subdued economic activity in fourth quarter

With coalition talks currently underway, he warns that sentiment is only expected to improve once there is more clarity and of course depending on the final outcome.

“The risk of sporadic loadshedding also remains alive with South Africa having recently entered its winter period, which usually results in increased electricity demand.”

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