Manufacturing expected to deteriorate further after April decline

MANUFACTURING in South Africa ground to a virtual standstill last month and was expected to deteriorate further this year, despite the gradual easing of the coronavirus restrictions last week.

The Absa Purchasing Managers’ Index (PMI) index yesterday showed that manufacturing output hit an all-time low last month on the fiveweek nationwide lockdown, which saw business activity suspended except for the provision of essential goods and services.

Absa said the index dipped to 46.1 points from 48.1 points in March, taking sentiment further from the benchmark level of 50 points that separates expansion from contraction.

The bank said almost all respondents reported a decline in activity, compared with the previous month.

Absa said although the production of some essential goods continued during April, it was concentrated in specific sub-sectors. It said many respondents indicated that zero production took place during the lockdown.

Absa corporate and investment banking economist Miyelani Maluleke said the index that tracks expected business conditions in six months’ time ticked down further from the record low recorded in March.

“The PMI survey shows the immediate devastating impact the lockdown had on manufacturing output and overall demand,” Maluleke said.

“While some easing of restrictions from May should aid a slow recovery in coming months, a lot of manufacturing capacity will remain idle for some time.”

The PMI’s current reading is about 25 points below the lowest level recorded during the 2008/9 global financial crisis. Absa said this suggested that the decline in actual manufacturing output will be well in excess of the drop recorded at the time, a 23 percent annual fall in April 2009.

With no to little activity in the local economy in April, overall demand for manufactured goods also plummeted.

Investec economist Kamilla Kaplan said the drop suggested that the PMI was sharper than during the global financial crisis. “The outlook for the remainder of the second quarter of 2020 quarter is poor,” Kaplan said.

“The easing of the lockdown level from five to four on May 1 will not offer much relief, as it still precludes much of the manufacturing sector from operating.”

The new sales orders index plunged to 8.9 index points, reaching a record low by some margin since September 1999, while export sales also fell sharply.

The employment index tracked activity lower, as about half of the respondents reported a decline in their staff complement.

Absa said more job losses were likely in the future.

Steel and Engineering Industries Federation of Southern Africa economist Marique Kruger said there was a need for increased demand-side interventions to boost aggregate domestic demand.

Kruger said these interventions should include a renewed commitment to support local procurement and pursuing import substitution to mitigate job losses.