Manufacturing Conditions Sour In January

5 February 2020 – The Absa PMI fell more than expected in January with the subindex tracking expected business conditions sliding to its worst level in over a year

Business conditions in the manufacturing sector deteriorated more than anticipated in January, with expectations for the coming months souring to their lowest levels in more than a year.

The uncertainty about load-shedding and the prospects for the global economy are set to add to the gloom.

The Absa purchasing managers’ index (PMI) declined 1.9 index points to reach 45.2, according to a release from the bank, its worst level since September 2019. This was worse than market expectations, which estimated a reading of 47.3, according to a Bloomberg survey.

The subcomponent tracking manufacturers’ expectations of business conditions in the coming six months, slid to 42.5, its lowest level because October 2018.

The ABSA PMI, released in conjunction with Stellenbosch University’s Bureau for Economic Research, is a monthly gauge of business conditions in the manufacturing sector. A reading below 50 points indicates a contraction in activity, while a reading above 50 indicates expansion in the sector. Manufacturing accounts for about 14% of SA’s GDP.

“Uncertainty about the frequency and severity of load-shedding in future and the strength of the global economy — and thus external demand — likely dimmed prospects,” the bank said in a press release.

The broader performance of the PMI’s other sub-components was mixed — with two recovering from multiyear lows experienced in December, while the other three declined in January.

The index tracking employment in the sector slumped to a seasonally adjusted 37.8, the lowest level recorded in almost six years when it hit 37.6, in May 2014

“This result corresponds with recent announcements of planned retrenchments in the factory sector and wider economy,” Absa said.

The recent string of very downbeat readings from the Absa PMI suggests that the measure is reflecting underlying weakness in the sector, said Virág Fórizs, Capital Economics emerging markets economist, in a note.

“January’s survey data dash hopes for a strong start to the new year,” he said, adding that despite a stronger November, the economy may have shrunk again in the fourth quarter of 2019, entering a technical recession.

The business activity index, which hit record lows in December, recovered in January. But at 44.6 the level of activity remained low. “This suggests that weak manufacturing output was sustained at the start of the new year. The soft output was even without nationwide load-shedding during most of the month,” the bank said.

The subcomponent tracking new sales orders, also recovered in January from multiyear lows in the previous month, but remains in contraction territory at 42.5 index points, suggesting demand for factory goods is still “very poor”.

There is some indication that the downturn in global manufacturing may have stabilised with scope of an improvement into 2020, barring a severe global growth and trade fallout from the coronavirus, said Investec economist Kamilla Kaplan in a note. Despite this, SA’s manufacturing sector still faces headwinds, she warned.

“Should the external environment turn more favourable over the course of the year, a recovery in SA’s manufacturing sector will still be hindered by subdued domestic demand, weak electricity infrastructure and elevated operating costs particularly, on the administered front,” she said. Source( Business Live)