MANUFACTURING activity plunged to its lowest level since August 2011 in June, with new sales orders and business activity hit the hardest, a key survey showed on Monday.

South Africa's purchasing managers' index, seen as a reliable health gauge for the economy's second-biggest sector, dropped by 5,4 points to 48,2.

It was the first time since December last year that the index, sponsored by Kagiso Tiso Holdings, had fallen below the neutral 50 level that divides expansion from contraction.

"This moderation in manufacturing production has dampened the outlook for overall GDP (gross domestic product) growth in the second quarter of 2012," the company said.

Abdul Davids, research head at Kagiso Asset Management, said the outcome could not be blamed entirely on weaker external demand from South Africa's key export markets.

The data indicated a "sustained and worsening slowdown in domestic demand", he said in a statement.

The new sales orders index, the PMI component with the biggest weighting, fell by 5,2 points to 46,5. The business activity index recorded the largest decline, falling nine index points to 47.

"This component was last at these levels in mid-2011, when factory sector output was negatively affected by industrial action," Mr Davids said.

The employment index fell back below 50 to 46,8, but Mr Davids said anecdotal evidence suggested employment was steady in manufacturing rather than falling.

On a more positive note, input cost pressures moderated significantly, with the price component losing 8,5 index points to reach 65,1.

The continued decline in oil and other raw material prices seems to have outweighed the impact of the rand exchange rate, which continued to weaken against the US dollar," Mr Davids said.

isam@bdfm.co.za