Manufacturing activity at 10-year low

PMI drops to 10-year low as weak demand forces industry to cut back on production amid a gloomy picture

ACTIVITY in the country’s manufacturing sector tumbled to a 10-year low as worries about stagnant growth forced the industry to cut back on production on lower demand.

Absa yesterday reported that its Purchasing Managers’ Index (PMI) dropped to its lowest level since the 2008/09 recession, declining to 41.5 index points last month from 45.7 points in August.

This was the second consecutive decline and brought the index more than 10 points below a recent high of 52.1 points in July.

When the July print was released, Absa cautioned that the robust reading was unlikely to be sustained as the subdued growth in Europe and the US-China trade spat would hurt exports.

The new sales orders index recorded the biggest decline of the PMI’s five subcomponents, falling by 7.8 points to reach an almost one-year low in September.

Purchasing inventories and business activity also saw a sharp drop.

All three indices fell by more than six points to reach levels around 40 points.

The business activity index fell by 6.5 points to 39.3 points, the lowest level in just over a year, and suggested that output remained under significant pressure.

In July, manufacturing production fell 1.1 percent after a 3.6 percent contraction in June, while the August output data which is due next week was expected to show another decline.

Absa said that it was unlikely that the manufacturing output would improve on a sustained basis at a time when trading partners were struggling.

“Indeed, while the September PMI already paints a dismal picture of current conditions, respondents expect the environment to worsen further going forward,” it said.

The poor output comes against a backdrop of growing concerns about the health of the global economy and, in particular, South Africa’s trading partners in Europe.

Investec economist Kamilla Kaplan said that the declining PMI for September suggested weak actual manufacturing production for the third quarter.

“The deterioration in operating conditions in the manufacturing sector were driven by a more rapid pace of contraction in production, new business and inventories amid subdued domestic demand and weakening global growth,” Kaplan said.

“Against the backdrop of lower demand and a cutback in production, manufacturers continued to reduce workforce numbers and business confidence dipped,” she added.

In contrast, the supplier deliveries subcomponent edged back above 50 points after dropping below the level in August.

The employment subcomponent rose slightly, but remained weaker at 39.6 points.

The Steel and Engineering Industries Federation of Southern Africa (Seifsa) said that the deterioration in overall business activity in the broader manufacturing sector was disappointing.

Seifsa economist Marique Kruger said that manufacturers were still struggling amid low business and consumer confidence.

“Worryingly, the trend in the majority of the sub-indices deteriorated in September 2019 when compared with August 2019, with the business activity sub-index (at 39.3 points) and the inventories sub-indices (at 39.6 points) performing the worst.

“However, the best performing sub-index was the supplier performance sub-index, rising from 48.7 points in August 2019 to 51.4 points in September 2019,” Kruger said.

But Kruger said that notwithstanding the decline, Seifsa remained hopeful that the performance of the sub-indices would recover and eventually improve the composite seasonally-adjusted PMI for this month.