May’s manufacturing conditions improve, though from low base

Conditions in the manufacturing sector improved during May, as SA went into level 4 of the Covid-19 lockdown, easing some of the constraints on the sector and the wider economy.

However, important subcomponents of the Absa purchasing managers index (PMI) remained in depressed territory — despite showing a recovery from historic lows. The underlying data pointed to still weak manufacturing capacity and depressed domestic demand, said economists.

The Absa PMI — released in conjunction with Stellenbosch University’s Bureau for Economic Research — is a monthly gauge of business conditions in the manufacturing sector. A reading below 50 indicates a contraction in activity, while a reading above 50 indicates expansion in the sector. Manufacturing accounts for about 13% of SA’s GDP.

With several official statistical publications delayed due to the coronavirus pandemic, the PMI is being closely watched as one of the few data points that has been able to provide some insight into the economy’s performance during the ensuing lockdown, which moved to level 3 on Monday.

After plunging to record lows of just 5.1 index points, the business activity subcomponent of the PMI shot back up to 43.2 index points in May.

“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,” Absa said in a release on the data.

“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,” it said.

Another important subcomponent — the new sales orders index — recovered from a record low of 8.9 in April, though not to the same degree as business activity, rising to 41.2.

The subindex gauging employment levels in manufacturing languished at close to historic lows, recovering just 0.2 points to reach 26.8 in May.

“Many businesses that were able to return to production in May, from the lockdown in April, were not permitted to do so at full employment capacity,” Absa said. “Until activity picks up firmly on a sustained basis, employment is unlikely to increase meaningfully.”

The recovery in output and new sales orders did, however, lift the headline PMI number to 50.2  in May — putting it back into expansion territory — and its highest level since July 2019.

But, given “the unique circumstances” of the current crisis it is better to look at the subcomponents than the headline PMI, Absa said.

This is in part because another subcomponent of the PMI — supplier deliveries index — inadvertently lifted the headline figure.

This subcomponent is inverted, Absa noted, which means that when goods are less readily available than before and delivery performance worsens, this actually lifts the index.

The longer supplier delivery times continue to prop up the overall index and suggest that as these lead times normalise as the economy opens up, the PMI is likely to fall again back towards the mid-40s in the coming prints, said Jeff Schultz, senior economist at BNP Paribas Corporate Investment Banking SA

When excluding the supplier-deliveries weighting from the headline PMI, the underlying PMI picture still stood at a tepid 35.3 index points in May, said Schultz, “indicative of still very severely weakened manufacturing capacity and depressed domestic demand”.

The May upturn was not surprising given the partial opening of manufacturing under level 4, said Sanlam Investment chief economist Arthur Kamp.

Under level 4, manufacturing across the board was able to return to activity levels of 30% employment — though some industries were able to return with employment rates of between 50% and 100%.

“We’ll probably see another upturn in June at level 3, because now you are allowing all manufacturing,” he said.

That was, however, on condition that SA’s coronavirus infection rates did not increase to a level where there were further intermittent shutdowns of businesses or the return of whole regions to harsher lockdown levels, Kamp said

donnellyl@businesslive.co.za