June 1, 2020
After plunging to an all-time low of a mere 5.1 index points in April, the business activity index of the Absa PMI survey rose sharply to 43.2 index points in May. “The increase was driven by most factories returning to production, albeit at reduced capacity, during May, after the Level 5 nationwide lockdown brought manufacturing output to a near standstill in April,” said Miyelani Maluleke. Economist at Absa Corporate and Investment Banking.
Many respondents reported that production was still well below normal capacity in May but, nevertheless, higher than that (in some case zero production) recorded in the previous month. “The sharp rise in the business activity index in May is relative to virtually nothing in April and still suggests very subdued overall activity levels,” explained Maluleke. Worryingly, some respondents indicated that whereas the lockdown regulations in May would have allowed for a further ramp-up of production, there was not sufficient demand to warrant this. Indeed, the new sales orders index did not rebound to the same extent as the output index. Furthermore, the employment index remained stuck at an all-time low, rising by a marginal 0.2 points to 26.8 in May.
The sharp month-on-month movement in the output index in May should be visible in the official manufacturing production data as well. April is likely to see an unprecedented drop, with a solid month-on-month rebound expected in May. Assuming Level 3 (or lower) is maintained for the entire country during the full month, output should recover further during June. Indeed, the PMI’s expected business conditions index rebounded in May from an all-time low reached in April, rising to the best level since mid-2019. However, this does not mean that the level of factory output will return to where it was before the lockdown. It will likely take some time before the supply-chain disruptions are filtered out of the system and for global as well as local demand to return to normal. The risk that load shedding could reappear as the economy gets going could further hamper the recovery. It is also important to note that the South African economy was already struggling before the COVID-19 pandemic reached our shores. In early 2020, the business activity and new sales orders indices of the Absa PMI already fell to levels last seen during the recovery of the 2008/09 recession.
The increase in the output and new sales orders indices supported an increase in the headline manufacturing PMI which rose to 50.2 index points in May. However, as stressed last month, in these unique circumstances, it is better to look at the subcomponents than the headline PMI. This is not only the case in South Africa, but also globally where the supplier deliveries index inadvertently lifts the headline PMI. This subcomponent is inverted which means that when goods are less readily available than before and delivery performance worsens, this actually lifts the index. This is because in normal times, an order that takes longer to be delivered is indicative of increased demand by the manufacturing sector for inputs in the production process. “Last month, and to a lesser extent in May, COVID-19-related production stoppages disrupted the supply chain to such an extent that deliveries were slower even without increased demand,” said Maluleke.
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