Picture: MASI LOSI
Picture: MASI LOSI

Activity among factory owners has climbed to its highest level in more than three years, indicating expansion in the manufacturing sector for the first time this year.

The seasonally adjusted Absa purchasing managers’ index (PMI) rose to 52.1 points in July from 46.2 in June. The last time the index was this high was in June 2016. It is also the first time this year that the index has breached the neutral 50-point mark; the PMI last came in above 50 in December 2018.

This will come as a surprise to economists polled by Bloomberg who expected the index to remain in contractionary territory at 46.5.

The index gauges activity in the manufacturing sector and a score above 50 indicates expansion, which bodes well for growth in the sector at the start of the third quarter. The monthly survey tends to be a good predictor of the manufacturing production and sales figures Stats SA provided two months later. Manufacturing is the fourth-biggest sector in the economy and accounts for about 13% of GDP.

A rebound in the sector indicates that GDP could pick up. In the first quarter of 2019, the economy contracted more than expected after the worst power cuts the country has seen dented both the retail and manufacturing sectors. However, growth is still likely to remain below 1% this year.

“Activity data from a variety of sectors all point to a recovery in the economy, but growth last quarter was still probably less than 2%, so the economy will not make up the ground it lost in the first quarter,” Capital Economics economist John Ashbourne said.

Four of the five major sub-components came in above 50 points, which points to an expansion in activity. The employment index, the only one to remain below 50 in June, edged 1.4 points higher to 43.1. The bleak outlook for job prospects in the sector follows the unemployment figures released by Stats SA on Tuesday, which were at an 11-year high of 29%.

Despite the good news, Absa warned that “given growing concerns about the health of the global manufacturing sector, it remains to be seen whether this improvement can be sustained”.

This is because the figures are often volatile and don’t always correlate with the production figures. Some of the increase in July could also reflect efforts by some firms in the manufacturing sector to build up stockpiles in light of ongoing wage talks and the risk of strikes, Absa economist Miyelani Maluleke said.

The expected business conditions index declined to 54.5 points in July, which is more than 12 points below the level recorded at the start of the year. 

menons@businesslive.co.za