Manufacturing conditions improve in September
But the better figure ‘could still be entirely consistent with the level of output remaining well below that recorded prior to the lockdown’
Manufacturing conditions steadily recovered in September as a shift to level 1 lockdown in the middle of the month likely drove improvements in the sector.
The Absa Purchasing Managers’ Index (PMI) — released in conjunction with Stellenbosch University’s Bureau for Economic Research — rose to a 21 year high, reaching 58.3 index points.
But this does not translate to official manufacturing activity being back to pre-pandemic levels, the bank said in a statement, on Thursday.
“Due to the month-on-month comparison asked for in the PMI questionnaire, the high level merely means that conditions continue to improve, ” the bank said, with more respondents reporting an increase in output for example, instead of no change or a decline compared to the previous month.
“This can still be entirely consistent with the level of output remaining well below that recorded prior to the lockdown,” it said.
“Overall, the PMI data from July to September point to a strong rebound in the sector after the lockdown-induced slump in Q2,” said Absa economist Miyelani Maluleke in a note.
He cautioned however that “survey based measures of activity such as PMI data have their weaknesses”.
For example the data is unweighted, which means the response of a small manufacturer will have as much of an effect, as the response of a large manufacturer, he said. The official output data, from Stats SA, "will be key for a clearer read of the nature of the recovery", said Maluleke.
The most recent manufacturing production data for July showed a monthly uptick of 7.6%. But on an annual basis the sector was still down 10.6%.
The monthly gauge provides a read on business conditions in the manufacturing sector, and a reading below 50 indicates a contraction in activity, while a reading above 50 indicates expansion.
The Covid-19 pandemic and the lockdown, sparked an unprecedented 51% annualised GDP contraction in the second quarter of 2020, with manufacturing being one of the sectors hardest hit. It contracted almost 75% and was the largest contributor to the overall decline.
Nevertheless, the PMI’s improvement — up from August’s 57.3 — was better than expectations for 55.5 points according to a Bloomberg poll. The PMI has stayed in positive territory for 5 consecutive months since the economy slowly started opening up after the hard lockdown during all of April.
The bank noted that purchasing managers remain optimistic about business conditions going forward. The index tracking expected business conditions in six months’ time ticked up to 64.5 from 63.4 in August and a low of just 27.3 index points in April.
The subcomponent covering business activity — which the bank said probably better reflects output dynamics — has averaged 64.6 points in the third quarter after a slump in the second quarter under the worst of the lockdown restrictions.
This positive quarterly performance suggested that the sector should record a sizeable quarter-on-quarter rebound from the Q2 slump, according to the Bank.
Michael Ade, chief economist for the Steel and Engineering Industries Federation of Southern Africa, said the sustained improvement in the PMI, “offered hope and modified expectations for broader manufacturing and could be seen as a preview to enhanced industrial activity.”
The employment index however continued to be a drag on the PMI, reaching 44.5 points. This still points to lower employment “but suggests that the pace of retrenchments slowed” Absa said.
According to Stats SA’s Quarterly Labour Force Survey, released earlier this week, manufacturing — which accounts for about 10.3% of employment — lost 185,000 formal-sector jobs in the second quarter. On an annual basis, the industry has shed 276,000 formal sector jobs.
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