Weak PMI signals poor manufacturing outlook

Cape Town - The Barclays/BER Purchasing Managers’ Index (PMI) has declined further below 50 for the fourth consecutive month, dipping to its worst level since August 2009.

The seasonally adjusted Barclays Purchasing Managers’ Index fell to 43.3 in November from 48.1 index points in October, keeping the headline index stuck below 50 for a fourth straight month. This suggests that the manufacturing sector is struggling to gain traction in the face of broad-based weak demand.

This move was despite limited incidences of load shedding.

The BER, however, warned that although downward pressure on manufacturing production from electricity supply constraints have lessened recently, the impact of drought and possible water restrictions remains a key risk to the industry going forward.

In addition, elevated energy and labour input costs, coupled with soft demand prospects, will continue to weigh negatively on manufacturing output in upcoming months.

The BER also warned that the weaker rand has offset the positive impact of lower oil prices and as a result manufacturers continued to face rising cost pressures.

MMI chief economist Sanisha Packirisamy said although the drop in the headline print was reasonably broad-based, a 7-point drop in the new sales orders sub-index was notable, highlighting poor demand for SA’s manufactured goods.

The PMI also showed that manufacturers are unlikely to hire aggressively any time soon, with the employment indicator falling sharply to 40.7 index points in November, from 44.0 points in October.

This sub-component has averaged at 46.2 index points since the global financial crisis suggesting benign employment growth in the manufacturing sector.

"In our view, high nominal wage settlements and labour market tension continues to deter hiring, while fragile demand has played a further role in dampening capital investment spend and jobs growth in the sector."

Packirisamy said South Africa has been underperforming the global PMI trend, with the Markit manufacturing PMI for the Eurozone ticking higher to a 19-month high at 52.8 index points in November from 52.3 points the month before.

In the UK, the PMI fell slightly to 52.7 points, but the headline index remained in expansionary territory.

In China, although the official manufacturing PMI reading slipped to its lowest level since August 2012 at 49.6 points from 49.8 points in the previous month, a stronger performance in the services PMI allayed growth fears, said Packirisamy.

She said the growth outlook for South Africa remained weak as the agriculture, mining and manufacturing sectors remain under pressure.

"The BER highlighted the seven-year low in expected business conditions (in six months’ time), implying little hope of a quick turnaround in manufacturing conditions any time soon.

Moreover, the PMI leading indicator (new sales orders less inventories) dipped lower over November confirming depressed manufacturing sentiment.

"Sticky input costs, drought conditions and muted commodity prices are likely to suppress growth in the primary sector (agriculture and mining) of the economy, while pessimistic manufacturing sentiment could damage growth prospects in SA’s secondary (GDP) sector.

"We expect mild growth in the (less cyclical) services/tertiary sector of the economy to keep real GDP growth close to 1.5% on average between 2015 and 2016," said Packirisamy.

Source http://www.fin24.com/Economy/weak-pmi-signals-poor-manufacturing-outlook...