July 9, 2020
The Absa Purchasing Managers’ Index (PMI) for July declined slightly compared to the previous month, but continued to signal a further month-on-month improvement for conditions in the manufacturing sector. The PMI declined to 51.2 index points in July from 53.9 in June, thereby staying above the neutral 50-point mark for a third consecutive month. This suggests that official manufacturing output should still reflect a month-on-month improvement in activity, but that levels are stabilising and that July’s increase is likely to be significantly less than those signaled by the PMI for May and June.
Despite ticking down slightly, the business activity index remained at an elevated level in July. This was despite a bigger decline – albeit still signaling a further monthly improvement – in the new sales orders index. The fact that more respondents signaled a further increase in output compared to those seeing further growth in demand, could perhaps be explained by some firms producing more in an attempt to catch up on production lost during earlier stricter lockdown levels. Importantly, despite sharp monthly improvements, some respondents noted that output remained below pre-lockdown levels. This means that, on an annual basis, official output is still expected to be down in July. On a positive note, respondents reported a slight increase in export sales for the first time since October 2019. The shape of the GDP recovery in Europe, a key market for South African manufacturing goods, will be important for local producers targeting the export market going forward. The notable rise in the preliminary Eurozone manufacturing PMI during July is positive in this regard.
A very worrying feature of the latest PMI survey is that the employment index remained particularly weak and, unlike the demand and activity indices, has barely recovered from the sharp plunge in April. Formal-sector employment tends to lag activity trends. The PMI employment indicator suggests that further job losses are likely, after an initial hit to employment, expected in the second quarter.
Finally, purchasing managers turned slightly more optimistic about business conditions going forward. The index tracking, expected business conditions in six months’ time, rose to 51.8 index points in July. While this is the best level in a year, it is still a fairly subdued reading compared to the series long-term average which sits just above 60 points.
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