Picture: THE TIMES
Picture: THE TIMES

A KEY leading indicator of activity in the manufacturing sector rose slightly last month, suggesting sentiment and production improved after most of the workers who had participated in wildcat strikes in August and September returned to work.

The seasonally adjusted Kagiso purchasing managers index (PMI) rose by 2.4 points to 49.5 in November, from 47.1 in October.

Rand Merchant Bank economists Carmen Nel and Mamello Matikinca said in a research note that a more competitive exchange rate could improve the outlook for manufacturers, but cautioned that the effect of the strikes in the third quarter would continue to be felt.

They said "the near-term outlook remains a concern due to the ongoing spillover of the supply disruptions in the mining sector".

Despite its improvement, the PMI remains below the important 50-point level which marks the difference between a contraction and expansion in activity in the sector.

The weakness in the PMI is not surprising given a slowdown in global demand and the effect of the strikes. The weakness is also in line with trends in other countries.

"PMI readings in the eurozone, the leading foreign market for our locally produced goods, remain in contraction," Kagiso Asset Management head of research Abdul Davids said.

Mr Davids said the declining trend in the average PMI boded ill for the sector’s contribution to fourth-quarter growth.

"The declining trend in the average PMI suggests that the manufacturing sector’s contribution to fourth-quarter GDP (gross domestic product) could be lower than the third quarter," Mr Davids said.

The PMI’s business activity index gained 2.7 points to 45.9. Mr Davids said that while this was an improvement, the level of the index continued to suggest output remained under pressure.

"Similarly, while new sales orders rose by 2.4 points, its level of 47.7 points to persistently weak demand," he said.

The expected business conditions index of the PMI declined significantly, by nearly five points, in November, following gains in September and October.

Absa Capital economists said: "The expected business conditions subindex has improved markedly recently, most probably due to the improvements in South Africa’s trading partners’ economies."

Input costs continued accelerate, with the price index recording its fourth consecutive increase to 79.5, its highest level since January.

Mr Davids attributed the rise in costs over the past few months largely to the weaker rand, which averaged R8.78 to the dollar last month, compared with R8.65 in October.

The employment subindex showed some positive news as it broke through the 50-point mark to reach 52, its highest level this year.

But Mr Davids warned against reading too much into this improvement, saying recent research showed executives in the manufacturing factory sector were pessimistic about employment trends and expected a further deterioration in the job market during the first quarter of next year.