PMI update: August lift in PMI, to 44 from 42.9, underpinned mainly by increased operating cost pressures, with actual activity still subdued

01 Sep 2017

Annabel Bishop

Chief Economic

The manufacturing PMI lifted to 44.0 index points in August from 42.9 in July. Levels in the vicinity of 42.9 were last registered during the recessionary conditions in 2008/09.

The increase in the PMI in August stemmed mainly from a 5.9 index point rise in the price sub-index to 67.2. The survey report suggests that contributing factors to the upside operating cost pressures were an “(on average) weaker rand exchange rate and uptick in Brent crude oil prices”.
Based on the activity indicators comprising the PMI, actual manufacturing activity remained weak.
Specifically, the index readings for business activity and new sales orders rose but remained below 50, suggesting that production and demand continued to contract, albeit at a slightly slower rate (see figure 2).
International leading indicators, such as the global PMI for export orders, continue to signal sustained growth momentum for global trade (see figure 3). As such, it can be deduced that the underperformance of the local manufacturing sector can be linked to weak domestic demand.
Challenging demand conditions likely account for the pessimism amongst purchasing managers reflected in the drop of the index measuring expected business conditions in six months’ time to below 50. Additionally, the survey report notes that the wage agreement in the steel and engineering sector was not yet concluded before the PMI survey was conducted and concerns of strike action may have weighed on sentiment.
Subdued activity and suppressed confidence in the sector continue to manifest in job shedding, with the employment sub-index at 47.0 in August.
The PMI averaged 43.5 in the first two months of Q3.17 and, at this stage, suggests that the manufacturing sector may again weigh on GDP. Next week’s Q2.17 GDP update is expected to confirm a rebound in the manufacturing sector in Q2.17 after three consecutive quarters of contraction. It would appear from the advance indications provided by the PMI that the Q2.17 recovery will not be sustained into H2.17.