September 1, 2020
The Absa Purchasing Managers’ Index (PMI) posted a robust increase to 57.3 index points in August, up from 51.2 in July. This points to a further improvement in conditions in the manufacturing sector as South Africa’s COVID-19 lockdown restrictions eased further to Level 2 in August. As a result, both business activity and new sales orders rose in August. The improvement in demand was not only due to South Africa moving to a lower lockdown level, but was also supported by an uptick in export orders.
Crucially, while the level of the PMI is now well above pre-pandemic levels, this is unlikely to be the case when the actual manufacturing activity data for August is released later. The performance of the PMI during lockdown has shown that the level of the headline index is arguably less informative than the month-on-month movements. This is both in terms of the direction (up or down) and the magnitude of the monthly change. Actual manufacturing activity (production) crashed in April, but subsequently recorded strong monthly increases in May and June as foretold by the uptick in the PMI’s activity index in those months. The PMI suggests that the recovery stalled in July, but likely found renewed momentum in August. Given the magnitude of the drop recorded in April, and the continued restrictions placed on the manufacturing sector until recently, as well as social distancing measures possibly still preventing many factories from returning to full capacity currently, it will take months of strong month-on-month growth to return to the actual level of activity recorded prior to the start of the nationwide lockdown in late March.
Production levels in some subsectors may indeed be back (or even exceed pre-COVID levels) in August, but overall activity is likely to still be lower. Indeed, while activity and demand are clearly recovering from extremely low levels, the employment index remains significantly more subdued. This also underscores the point that the uptick in activity is not resulting in output that exceeds current production capacity. The inventories and employment indices continue to be the main drag on the headline PMI.
Despite the level of the PMI more than likely overstating the extent of the recovery, the renewed increase in the PMI in August is encouraging, especially as it seems to be supported by both local and export demand improving. Furthermore, purchasing managers have turned notably more optimistic about future business conditions. The index tracking expected business conditions in six months’ time rose to the highest level in about 18 months.
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