Manufacturing activity falls to worst level in a decade
Conditions are not expected to improve as domestic demand remains under pressure
Manufacturing activity contracted further in September, underscoring continued weak domestic demand conditions and growing concerns about global economic growth, particularly in SA’s trading partners in Europe.
The seasonally adjusted Absa purchasing managers’ index (PMI) fell to 41.6 points, well under the neutral 50 point mark and is the worst reading in a decade. This was down from 45.7 in August, according to the bank, which puts out the index in conjunction with Stellenbosch University’s Bureau for Economic Research.
The index is a monthly gauge of manufacturing activity and an early indicator of underlying economic activity in SA. A reading of less than 50 points indicates a contraction in activity, while a reading of more than 50 indicates expansion in the sector. Manufacturing accounts for about 14% of SA’s GDP.
The reading came in below market expectations — a Bloomberg poll of economists expected the reading to recover somewhat from August’s and reach 46.5 points.
The September decline was led by a sharp drop in three of its five sub-components: new sales orders, which fell to 40.7 points; purchasing inventories, which declined to 39.6 points; and business activity, which fell to 39.3 points. This was the lowest level for the business activity index in a year and the lowest level for inventories in a decade.
According to the bank, there is little expectation that conditions will improve anytime soon. The index that tracks what business conditions are expected to be in six months, declined to 46.1 points. This is the fourth consecutive month expectations of business conditions have fallen.
The poor print comes as worry grows about the health of the global economy, particularly SA’s key European trading partners. The preliminary manufacturing PMI reading for the eurozone fell to the weakest level in more than seven years in September, with the German PMI dropping to its lowest level in more than a decade.
“It is unlikely that the SA manufacturing sector will improve on a sustained basis at a time when our key trading partners are struggling. Indeed, while the September PMI already paints a dismal picture of current conditions, respondents expect the environment to worsen further,” the bank said.
Although SA’s economic growth recovered in the second quarter in 2019 rising 3.1%, the annual growth rate was a far less stellar 0.9%. Economists have noted that higher frequency data continues to suggest that the economy is struggling to gain momentum.
“It is difficult to overstate how bad a result this was for SA’s fragile manufacturing sector,” said John Ashbourne, senior emerging-markets economist at Capital Economics. The September reading was the weakest yet released across the emerging world, he said, and added to evidence that the economy is faltering.
Despite an uptick in economic growth in the second quarter, the underlying momentum of the economy remains weak, said Ashbourne. The first batch of data from July suggested that growth eased again at the start of the third quarter
Said Ashbourne: “Indeed, today’s reading suggests that there’s a reasonable chance the economy actually contracted last quarter.”