May PMI

An important economic indicator came out today – the Purchasing Managers’ Index, or PMI. It is published by Kagiso Asset Management and gives an insight into the state of the manufacturing sector. The index number for May came in at 50.4 points, unchanged from the previous month. This suggests there is little momentum in this key sector of the South African economy.

Expert views:

Chriosto Luus at Ecoquamnt:

The unchanged PMI for May – against the consensus view of a drop to below the 50 point level – can probably be construed as good news. However, the relatively low and unchanged PMI level shows that the manufacturing sector is still struggling. This is borne out by the fact that the PMI’s business activity and new sales orders indices both lost ground, while the inventory level subcomponent increased.

Abdul Davids of Kagiso Asset Management

Conditions in the manufacturing sector remain tough. The outlook, albeit bleak, is quite mixed with the expected business conditions index posting its second consecutive gain.

Coenraad Bezuidenhout of the Manufacturing Circle:

Manufacturers are holding the fort in tough trading conditions. Kagiso asset management is correct in their assessment that the slow international demand, slowing local demand, and significant cost pressures remain significant challenges. Manufacturing costs are still driven chiefly by rapid, bunched-up administered price (those set by the authorities such as electricity tariffs) increases and the productivity that has not kept apace with salary increases. This leads to unavoidable margin squeeze, especially where the local manufacturer is unable to pass the cost increases on to the consumer, as a result of competition in the domestic environment from unfairly-incentivised imports. A more competitive currency will only aid manufacturing growth significantly if the former can be can be sustained, if we address numerous domestic policy challenges, if demand picks up in the Eurozone and America, if we can secure improved access to Asian and South American markets, and the systemic complexities challenging expansion into Africa receive resolute attention. Whereas manufacturing’s employment outlook remains stable at present, industrial unrest in the upstream sectors of mining and agriculture remains a significant risk.

George Glynos of ETM

The reading suggests that upside traction in the manufacturing sector lacks momentum as aggregate conditions remain tough. Despite a relatively sharp increase seen in employment which added 5.1 points to 47.2, the sub-component still remains below the 50 mark for the sixth consecutive month. Labour market dynamics continue to be of concern with the industry remaining hindered by labour unrest. Upcoming wage negotiations are a significant factor going forward as to the extent of employment growth for the rest of the year. Of the past 53 months, the employment index has been above 50, eight times. Had it not been for the rise in expected business conditions which is a very volatile subcomponent which can also reverse quickly, one suspects that the number would have printed sub-50 just as the non-seasonally adjusted reading has done for the past three readings. May’s PMI reading suggests that the manufacturing sector is still struggling to gain traction despite being above the neutral 50 level. With risks to growth tilted towards the downside, the SARB is expected to maintain an accommodative monetary policy stance. In the months ahead, weaker consumption spending will if anything contribute negatively towards internal demand conditions and consequently weigh on PMI. At the margin, this would offset any effects that a weak ZAR would have on bolstering demand for SA exports.

Conclusion

If the rand stays weak, there should in theory be a boost for our exporters, but overall the economy is limping along and manufacturing is in the doldrums.

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