Lockdown ravages manufacturing and there is no rapid upturn in sight
Subcomponents of the PMI crashed to record lows in April, pointing to the challenges in restarting the economy, economists say
As SA entered the first working day of level 4 lockdown, manufacturing data for April revealed the devastation wrought by the full lockdown phase on the country’s economy.
The Absa purchasing managers’ index (PMI) — a monthly gauge of business conditions in the manufacturing sector — is one of the first economic surveys to give a line of sight into the toll taken on business activity due to efforts to slow the spread of coronavirus.
Important subcomponents of the PMI crashed to lows not seen in the survey’s history, underscoring the near total halt to activity in a sector that accounts for about 13% of GDP.
The figures foreshadow the difficulty the sector, and the wider economy, are likely to face upon restarting, said economists. Level 4 of the lockdown allows for certain manufacturing subsectors to begin operating, either partially or in full.
The data comes amid growing criticism of the government over the reasoning behind some of its decisions — such as not allowing the opening up of online retail during stage 4.
The state sees an additional 1.5-million people returning to work under level 4, with greater production of items such as stationery, automotive components and winter clothing.
But data produced by the UN University World Institute for Development Economics Research (UNU-Wider), included in a recent presentation by the Treasury to parliament, suggests SA’s economy could contract as much as 16% in 2020 depending on the length and severity of the pandemic and the lockdown’s effects.
In a worst-case scenario as many as 7-million jobs could be shed, according to the presentation.
Though the headline PMI number was propped up by an anomaly in the make-up of the data, two important subindices, business activity and new sales orders, plummeted to unprecedented lows of 5.1 and 8.9 index points respectively.
At the same time the index measuring expectations of business conditions in the coming six months fell to 27.3 points, its lowest level on record.
The supplier deliveries subcomponent, which carries a large weighting in the PMI, and moves inversely to the index, provided an unintended boost to the headline number. This subindex measures supplier performance and under normal circumstances a slowdown in delivery times points to heightened activity in the sector.
Despite the unprecedented decline in other subcomponents, the inadvertent boost from supplier deliveries meant the headline PMI only fell to 46.1 index points in April, having seen lower levels in February. This means the headline reading does not provide a fair reflection of conditions on the factory floor in April, Absa said.
Though the level 4 lockdown envisages the return of some manufacturing production, real activity is unlikely to scale up in the way that government regulations suggest it will, Absa senior economist Miyelani Maluleke said.
At level 4, manufacturing across the board will return to 30% activity. A number of subsectors will be able to open up operations by between 50% and 100%.
“There may be some plants for which operating at a scale of 30% just does not make sense, given operating costs and the nature of that manufacturing plant,” said Maluleke.
There is also very little demand in the economy and it is unlikely to pick up even as the lockdown restrictions eased, he said. It is also not certain that supply chains, including those in other countries, that provide inputs to local manufacturers will normalise, he said.
“Given the absence of demand, given that supply chains won’t normalise very quickly, the risk is that there isn’t much of a recovery into May,” said Maluleke.
The collapse in subindices such as new sales orders suggests that the bulk of manufacturers in SA have “no clear line of sight” into future activity, Stanlib chief economist Kevin Lings said. This underscored the difficulties of re-engaging an economic system.
“You can put a system into hibernation ... or lockdown, but it is not easy to reinvigorate that system,” Lings said.
The effects of the pandemic and the lockdown have been compounded by the fact that SA’s manufacturing sector was very weak to start with, he said.
The headline index has remained under the 50 point neutral mark for all but two months since the start of 2019. A reading below 50 points indicates a contraction in activity, while a reading above 50 indicates expansion in the sector.
This suggests that a “V-shaped” recovery for SA’s economy — represented by a sharp decline and then rebound in growth is unlikely, said Lings.
“What it tells me is that the recovery phase is going to take time because you are going to have areas of the supply chain that are still disrupted and you may find this is a slow process towards switching things on again,” he said.