A KEY leading indicator of activity in the manufacturing sector — the seasonally adjusted purchasing managers' index (PMI) — shows the sector is under heavy pressure.
Factory output has been hit hard by both the global slowdown and a probable recession in Europe, which takes more than a quarter of South Africa’s manufactured exports.
The Kagiso Tiso Holdings PMI lost 0.8 index points in August, falling to 50.2 from 51 in July.
An index level of below 50 represents contraction in the manufacturing sector, while a reading of more than 50 signifies expansion in activity.
Kagiso Tiso Holdings said the latest reading placed the average PMI reading for the first two months of the third quarter at 50.6, which was lower than the average levels achieved in the first (55.4) and second quarters (51.8) of this year.
Abdul Davids, head of research at Kagiso Asset Management, said as a result, he expected the manufacturing sector to again place a drag on overall gross domestic product growth during the third quarter.
Figures showed manufacturing production contracted by 1% during the second quarter, after rising by 7.7% in the first quarter, reflecting a slump in demand for local exports.
More than two-thirds of local manufacturers export their products, with more than a quarter of the total going to Europe.
"If our expectation is correct, the implication of lower economic activity should increase expectations of further cuts by the Reserve Bank and support the short end of the curve," Rand Merchant Bank’s global markets team said in a research note.
The manufacturing sector accounts for more than 15% of the economy’s overall output and during the second quarter of this year it contracted by 1% compared with the previous quarter. During the same period, it shed 44,000 jobs, according to official data.
Some key subcomponents of the PMI were disappointing.
The PMI’s new sales orders index continued to be volatile, losing 5.3 points and falling back below the 50-point mark to 46.9.
"Despite the monthly volatility, we are seeing a clear downward trend in the demand for factory goods," Mr Davids said.
"After averaging at a robust level of 60.6 during the first quarter, this index declined to an average of 51.2 in the second quarter. The average for July and August was even lower at 49.6."
Purchasing managers continued to downscale their expectations, as reflected in the 1.1 point decline in the expected business conditions index to 52.9.
According to Mr Davids, the fairly downbeat outlook was also corroborated by the PMI leading indicator, which remained below one for the fifth consecutive month.
"This indicates that supply continues to exceed demand and this does not bode well for manufacturing sector production," he said.
After gaining nearly four points in July, the business activity index lost a negligible 0.2 points in August to remain steady at 50.6.
The rising oil price resulted in a sharp spike of 8.2 points in the price index, which was now at 70.9.
"Brent crude oil prices have been trading above $110 a barrel for some time and the Department of Energy has announced that local fuel costs will rise by 93c a litre at the beginning of September," Mr Davids said.
On a positive note, the employment index gained four points, to 51.
However, Mr Davids warned that, as was the case in May, not too much should be read into the improvement in the employment index.
"The last time the employment index was above the 50-point mark for more than two consecutive months was between February and April 2010. Even more striking is that 2007 was the last time that it measured above 50 for more than three consecutive months," Mr Davids said.
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