Manufacturing and car sales in focus

Manufacturing conditions and vehicle sales data are in focus on this week’s fairly quiet economic calendar. They could provide insight into the extent to which the economy’s recovery is retaining traction. The Absa manufacturing purchasing managers’ index (PMI) for February will be released on Monday.

Manufacturing conditions and vehicle sales data that is in focus on this week’s fairly quiet economic calendar could provide insight into the extent to which the economy’s recovery is retaining traction.

The Absa manufacturing purchasing managers’ index (PMI) for February will be released today.

The manufacturing sector accounts for about 14% of GDP and the PMI is a reliable monthly gauge of manufacturing activity and an early indicator of underlying economic activity in SA.

The index, released with the Bureau for Economic Research, is based on surveyed responses to a number of questions, including new sales orders, business activity and employment. A reading above 50 points indicates expansion in the sector, while anything below 50 points to a contraction.

During January the index was a mixed bag. Though it rose to 50.9 points from December ’ s 50.3, the subcomponent measuring business activity in the sector had declined to its worst level since May 2020 when SA experienced its hardest phase of Covid-19 lockdown.

During January the supplier deliveries subindex, which gauges supplier performance and moves inversely to the rest of the PMI, rose sharply due to supply chain disruptions caused by local lockdown restrictions and tighter restrictions globally.

A rise in this subcomponent can inadvertently lift the headline index and probably helped to keep the PMI in positive territory — or above the 50 point mark — during January, Absa said at the time.

A median forecast from Bloomberg has the PMI coming in at 50.8 points.

Investec is expecting the PMI to have lifted to 52.0 in February from 50.9 in January, thanks to increases on the suppliers’ and prices sub-indices, said economist Kamilla Kaplan.

This would be consistent with trends reported in international PMIs in the US, UK and eurozone that reflected supply chain disruptions linked to shortages of materials at suppliers and transport delays, Kaplan noted.

“As such, supplier delivery time lengthened significantly,” she said, adding that international PMIs for February showed increases in cost inflation linked to constrained supply and it is likely that local manufacturers were similarly affected.

“The SA PMI can be expected to show that the supply chain disruptions as well as relatively weak domestic demand [is] likely [to have] held back production volumes,” said Kaplan.

The economy-wide IHS Markit SA PMI for February is also due out on Wednesday.

The SA PMI is an indicator of private sector business performance taken from a survey of 400 private sector companies across the economy. It is derived from indicators for new orders, output, employment, suppliers’ delivery times and stocks of purchases. A reading of more than 50 shows overall improvement in the sector.

OUTSTANDING WORK

In January it rose to 50.8 points, thanks to an increase in private sector production. The upturn was in part thanks to efforts to fulfil outstanding work; however, new sales orders remained broadly flat, suggesting muted new demand from clients.

But FNB’s economics unit expects the SA PMI to rise to 51 points in February.

“Such an outcome would be positive and signal that most of the broader sectors were satisfied with operating business conditions in February after the relaxation of some aspects of the level 3 lockdown, including the unbanning of alcohol sales,” it said in a note.

“The risk is likely skewed to the downside given electricity shortages.”

February vehicle sales data from the National Association of Automobile Manufacturers of SA (Naamsa) will be out today.

Vehicle sales have had a slow comeback from the slump in 2020, underscoring the ongoing strain on consumers and businesses.

January 2021 sales were down 13.9% from the same month a year ago.

Absa’s economics team expects that there will be a rebound in vehicle sales on a month-on-month basis. However, on a year-on-year basis, car sales will likely be negative as vehicle sales remain below pre-Covid levels, it said.

On Friday the Reserve Bank is due to release its gross reserves position and its statement of assets and liabilities in which it records its ongoing government bondbuying efforts.

The Bank was forced to intervene in the local market after government bonds came under pressure as investors fled to safe-haven assets amid Covid-19-related panic, causing bond yields to spike in lateMarch.

This came as the government was forced to step up bond issuance to buttress added pandemic-related support efforts after several credit rating downgrades.

The Bank has maintained that its intervention was not aimed at influencing prices, but only at improving market functioning.

In the 2021 budget, the Treasury said that thanks to better-than-expected revenue collections, which have boosted the government’s cash balances, the government would be reducing debt issuance, a move that will probably take some pressure off the domestic market.