July 1, 2020
The Absa Purchasing Managers’ Index (PMI) for June showed that conditions continued to improve in the South African manufacturing sector. This is after most of the sector came to a near standstill during the nationwide Level 5 lockdown in April and only partially returned to normal production levels in May. The headline PMI rose further to 53.9 index points in June, up from 50.2 in May.
Following solid improvements in May, business activity and new sales orders both continued to recover in June, after having plunged to record lows in April. It is important to note that the PMI measures monthly movements. As seen with other data releases in May, even a partial reopening of sectors can result in a large month-on-month bounce back. Besides measuring the monthly change, the PMI asks qualitative questions (up, down, or the same). The resulting indices indicate the degree to which the measured change is dispersed through the sector.
In June, the majority of respondents reported that production and sales were higher when compared to May. This makes intuitive sense - the rise points to an increase in output in June relative to May as the further easing of lockdown restrictions allowed for more production to take place. Importantly, while the headline PMI rose to a multi-year high, this does not mean that the level of actual manufacturing production rose to a multi-year high. Instead, the further rise in June merely means that a solid month-on-month increase was likely recorded.
Many respondents noted that despite the monthly uptick, production was still below normal capacity. Indeed, continued restrictions in some non-manufacturing sectors of the economy (for example the hospitality industry) still weighed on demand and limited the need to ramp up production. Exports also remained weak in June. As such, on an annual basis (i.e. compared to June 2019), actual manufacturing output is still likely to record another steep decline in June, and it will take some time before the level of output returns to pre-pandemic levels.
While the consecutive month-on-month improvement in activity is encouraging, it is worrisome to note that the employment index remained extremely weak. This underscores that activity is merely slowly returning to normal and not exceeding available capacity. Further job losses in the sector, and the rest of the economy, could limit the overall recovery in demand.
Purchasing managers turned more optimistic about expected business conditions. For the first time since July 2019, respondents expect conditions to improve in six months’ time. The index tracking expected business conditions rose to 51.2 index points in June, after plunging to a mere 29.9 in April. This is still a fairly low level for this index, which averages above 60 points over the long term.
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