As the South African economy faces a litany of challenges, the Absa Purchase Managing Index (PMI) data released yesterday, compiled by the Bureau for Economic Research, showed that business activity in the manufacturing sector plunged for the second time in a row for the month of March.
In January this year, the PMI was at a high of 50.5 points, declining to 48.7 points in February, and now March recording a lower 48.1 points.
A reading above 50 reflects growth. Manufacturing is the country’s fourth biggest sector contributing 14% to GDP.
The reason for the data dropping was once again the rolling power cuts being imposed on the country by the beleaguered power utility, Eskom.
The country had to contend with load shedding every day this year as Eskom continues to face backlogs and breakdowns at their coal-fired power stations, unable to provide a steady flow of electricity.
Demand in the local industry dropped, the data revealed yesterday.
“Domestic demand seems to be struggling, with some comments referring to local demand faltering due to load shedding,” Absa said in a statement.
On the brighter side, however, Absa said participants in its survey were more optimistic about business conditions, going forward.
“Following a sharp deterioration in February, the index tracking expected business conditions in six months’ time rose to 55.5 from 46.8 in February, meaning that purchasing managers generally expect conditions to look better later this year,” Absa said.
“However, the long-term average of this index is well above the current reading, suggesting less optimism than usual,” the PMI report says.
Absa said it believes less intense load shedding during the second half of March would have helped to reduce the costs of running diesel generators.
Lara Hodes, an economist at Investec, said that the data was below expectations.
“The seasonally adjusted headline PMI moved further into contractionary territory in March, with a reading of 48.1. This was below consensus expectations of 49.5. While the business activity sub-index picked up slightly, it remained below 50.0 at 48.1, as the country’s critical electricity supply situation continues to present a significant impediment to optimal production,” Hodes said.
“The new sales orders index, however, fell further into contractionary territory, recording its lowest reading since October, last year. The index monitoring export sales fared well throughout Q1.22, increasing “to an almost two-year high in March,” according to the BER.
The pick-up in export activity is reflective of an improvement in the global environment as evinced by the PMIs of advanced economies. Specifically, the Eurozone’s latest PMI survey indicates that March’s manufacturing production “signalled the strongest monthly performance in factory output since May last year, according to S&P Global,” Hodes said.
Momentum Investments’ economist Sanisha Packirisamy told Business Report, “Manufacturing and mining data were firm at the start of the year with the quicker-than-anticipated reopening of the Chinese economy boosting production and offsetting the negative effect of a higher incidence of load shedding. However, the PMI indicates that this initial China-led bounce is unlikely to continue offsetting a higher severity of load shedding locally to the same extent as at the start of the year.”
She said that firmer data in the services industry including accommodation income, restaurant income and transport (freight and passenger rail) could help the economy avert a technical recession in the first quarter of this year.
On the PMI data showing a contraction, Packirisamy said with the weak levels of growth and sentiment, the country is unable to generate a high enough level of employment growth to fully absorb new entrants into the labour market.
“This is expected to worsen SA’s inequality, poverty and unemployment challenges. Even if the country manages to escape a technical recession in the first quarter of the year, the outlook remains bleak. We expect GDP growth to grind lower to 0.3% this year. Supply-side constraints, an elevated cost of living, muted (real) credit growth and subdued consumer sentiment will drive a slowdown in household consumption expenditure this year.
“Meanwhile, outside of energy-related investment, private sector fixed investment intentions will remain dampened by elevated political uncertainty, a higher cost of capital and demand pressures,” she said.
BUSINESS REPORT