ACTIVITY in manufacturing shrank last month for the fourth successive month — something last seen in the 2008-09 recession — a key health gauge for the sector showed on Wednesday.
The seasonally adjusted Kagiso purchasing managers index (PMI) fell 2.1 index points to 47.4 last month from 49.5 in November, suggesting the economy’s second-biggest sector could remain under pressure this year.
The December PMI was below market expectations for a slight increase to 50.2. A reading of below 50 signifies contraction in activity.
The contraction backs earlier comments by manufacturers that, despite expected modest gains this year, the continued slow demand from South Africa’s main trading partners will remain a challenge to growth in activity this year.
Chartered Institute of Purchasing and Supply Africa MD Andre Coetzee said on Wednesday the institute was not very surprised by the decline.
The institute assists with the compilation of the Kagiso PMI.
"We were cautious and not that optimistic about December.
"We were not convinced that all of the impact of the strike action in the third quarter had fed through the Kagiso PMI numbers yet and I think we are seeing that coming through now," Mr Coetzee said.
He admitted that there had often been a divergence between the PMI and actual manufacturing production data, but said that Kagiso’s figures nevertheless provided indications of where the sector was headed.
"Certainly we should be worried that the PMI is declining. The PMI is the first indication of what is happening in manufacturing.
"We expect actual manufacturing to come down in line with what the PMI is telling us," Mr Coetzee said.
December’s decline was attributed mainly to a 7.4 index point drop in the employment subindex to 44.7 — its lowest since August 2011.
"This sharp decline comes amid bleak employment dynamics in the manufacturing sector and adverse sentiment towards labour following various strikes in the second half of 2012," head of research at Kagiso Asset Management, Abdul Davids, said. Mr Davids said the PMI employment subindex had been volatile in the past, so more data was needed for a conclusive outlook on job prospects.
Manufacturing Circle director Coenraad Bezuidenhout identified other factors that could have influenced the index. "Many manufacturers had closed for the holidays in December. Although the strikes ended in the third quarter, there was still a significant amount of uncertainty, as well as headwinds with respect to electricity price increases," he said.
The new sales orders sub-index of the Kagiso PMI fell from 47.7 to 44.9 last month — its lowest since August 2009.
The price subindex was also a concern as it remained close to 80 last month. This suggested that input costs for manufacturers remained high and would likely continue to escalate due to expected higher electricity, fuel, and wage costs this year.
Manufacturers were optimistic about activity six months ahead, as shown by a rise in the expected business conditions subindex to 55.1 last month, from 52.4 in November.
Mr Coetzee cautioned, however, that the inventory index remained above demand and that this militated against "a quick production turnaround".
"When inventories are higher than new sales orders then it basically means there is limited room to continue producing," Capital Economics Africa economist Shilan Shah said. "The PMI is likely to remain subdued but remain in the high 40s in coming months," he said.
More in this section
- Fitch reaffirms SA’s borrowing credentials in global markets
- Slower household spending growth a negative omen
- Rand surges as current account deficit narrows unexpectedly
- Consumer inflation slows more than expected
- Wealth ‘created twice as fast’ in developing regions
- NEWS COMMENTARY: The jobs chicken comes home to roost after Marikana