Absa PMI shows some recovery for factories, thanks to less load shedding

The Absa Purchase Managers Index (PMI) for August shows that factories are getting back to work after a tough start to the third quarter, thanks to an easing in the intensity of load-shedding, with the PMI increasing to 52.1 points from 47.6 in July when loadshedding was harsher.

The business activity index rose above the neutral 50-point mark for the first time since March, before the flooding in KwaZulu-Natal and significant electricity supply disruptions sent it plunging.

Although new sales orders continued to decline for the second month in August, it was at a slower rate than before.

The PMI is an economic activity index based on a survey conducted by the Bureau for Economic Research (BER) and sponsored by Absa.

According to the index, domestic demand is expected to continue benefitting from the reopening effect, while the return of production at Toyota’s flood-affected factory in Durban also supports demand across the value chain.

ALSO READ: Marked decline in business activity illustrates true cost of loadshedding

Good news in the Absa PMI

The purchasing price index declined for a second consecutive month and is now at the lowest level since mid-2021, which means that the rate of increase in costs is slowing and not that prices are declining.

The index indicates that the steep fall in the fuel price at the start of August probably helped with alleviating overall cost pressures, with a further notable decline in the fuel price expected next week.

While headline producer price inflation (PPI) for final manufactured goods remains very high, the PMI suggests that cost pressure at the start of the pipeline has moderated.

Another encouraging improvement in the index was the increase in the expected business conditions index to 57.9 from 49.4 in July.

This could reflect optimism from purchasing managers that cost pressures will continue to abate over the next six months, while the energy reform measures announced late last month that was not fully captured in the July survey may also have lifted sentiment about the outlook.

After four months of below-50 readings, the business activity index returned to expansionary terrain in August, suggesting that actual manufacturing output should increase on a monthly basis from July on the back of significantly fewer electricity disruptions and the ramping up of production at Toyota’s Durban plant, that should boost vehicle output.

The new sales orders index also more than recovered from July’s loss, but stayed below the neutral 50-point mark, with global PMIs suggesting that external demand is weakening.

The employment index also increased but stayed within its recent narrow band around the neutral 50-point mark.

ALSO READ: Absa PMI shows worrying deterioration in demand and activity

Inventories remained volatile

However, the inventories index remained volatile and fell back to just above June’s level.

Despite the recent volatility, the index in general has averaged much higher than in recent years with 57.7 points so far this year.

The supplier deliveries index reversed half of July ‘s decline and moved up to 60 points in August, in line with the average level for the past four months, but below the 2020 and 2021 levels, probably because supplier deliveries are relatively quicker. Respondents noted that a further easing of disruptions could benefit output.

ALSO READ: PWC report: Local companies embrace international opportunities

Actual manufacturing output should increase

Research group Oxford Economics Africa says the improvement in the business activity index implies that actual manufacturing output should increase in August, despite new sales orders reflecting muted domestic demand.

“The expected business conditions index demonstrated an encouraging improvement by rising to 57.9 from 49.4 in July, possibly reflecting optimism that cost pressures will ease further over the next six months,” the group says.

According to Oxford Economics President Cyril Ramaphosa’s notable energy market reform announcements would have also lifted sentiment regarding South Africa’s economic outlook.

“Overall, we forecast that real GDP contracted on a quarterly basis in the second quarter and expect sluggish growth in the quarters to follow. South Africa’s real GDP growth is seen at 1.9% in 2022.”