Kagiso PMI shows SA manufacturing sector on the rebound

3 November 2014

The latest Kagiso Purchasing Managers’ Index (PMI) indicates South Africa’s manufacturing sector is rebounding, albeit at a slow pace.

The index rose for a third consecutive month in October and increased by 1 index point to 51.8. The rise brought the index to its best level since November 2013, signalling a relatively strong start to the fourth quarter.

The Kagiso PMI is an economic activity index based on a survey conducted by the Bureau for Economic Research in conjunction with CIPS Africa. Sponsored by Kagiso Tiso Holdings, the index is derived from monthly surveys of private-sector companies in the manufacturing sector, and is mostly used by economists to gauge the economic health of the manufacturing sector in the country.

A reading of below 50 indicates a reduction in manufacturing activity, while a reading of above 50 specifies an expansion in manufacturing activity.

Improvements in new sales index

The new sales orders index rose to a robust 55.9 index points from the previous 53 points, an indication that domestic demand is recovering from production stoppages related to industrial action in the mining and manufacturing sectors during the first seven months of 2014.

“If demand is sustained, as can be expected at this stage, the business activity index should also be able to edge up more significantly from its current subdued level (at 50.3 index points). However, even at its current level, the index is almost 5 points above the third quarter average. This bodes well for actual production growth in the sector,’ says Abdul Davids, Head of research: Kagiso Asset Management, in a statement.

The slight improvement in the Eurozone flash manufacturing PMI to 50.7 and the Chinese flash figure to 50.4 reflects stronger external demand. However, both Europe and China are underperforming compared to the US where the flash PMI came in at 56.2 and new sales orders stood at a robust 57.1 index points.

“Unfortunately, the US is not a large direct importer of South African manufactured goods, but an improvement in the US will support the overall global growth outlook,’ Davids said.

Inventories index also shows signs of rallying

The inventories index, which measures expected business conditions in six months’ time, also rose sharply from 5.1 index points to 60.4, suggesting that purchasing managers are confident that demand will be sustained going forward.

However, the index shows a slight decline in business activity in October, from 50.5 to 50.3. Even though the activity index remained subdued, it was almost 10 index points higher than three months ago.

The price index fell to 76.0 after four consecutive increases. “Lower domestic petrol and diesel prices on the back of the sharply lower international crude oil price, as well as a slight strengthening of the rand exchange rate, likely alleviated some of the cost price pressures,’ says Davids.

Employment index on the decline

On employment, the PMI paints a stark picture. The employment index declined to 46.1 index points in October and has now been below the neutral 50-point mark since March 2014, in tandem with employment statistics released by Statistics South Africa (StatsSA) last week.

The StatsSA Quarterly Labour force Survey results indicated that relative to Q2: 2014, the formal manufacturing sector lost 4 000 jobs in Q3: 2014. Compared to Q3:2013, the factory sector lost 38 000 jobs in Q3: 2014.

Employment forecasts also look bleak. The PMI indicates that the decline in the employment index from September to November suggests that the manufacturing sector is unlikely to regain any of these job losses in the fourth quarter.

SAinfo reporter