Absa’s July PMI Inches Down, But Remains Above Neutral 50-Point Mark

4 August 2020 – The Absa Purchasing Managers’ Index (PMI) for July declined to 51.2 index points, from 53.9 in June, but stayed above the neutral 50-point mark for a third consecutive month.

Absa and the Bureau for Economic Research (BER), which compiles the PMI on behalf of Absa, say this suggests that official manufacturing output should still reflect a month-on-month improvement in activity and that levels are stabilising.

Despite ticking down slightly, the business activity index remained at an elevated level in July. This was despite a bigger decline – albeit still signalling a further monthly improvement – in the new sales orders index.

Additionally, considering that more respondents signalled a further increase in output compared with those seeing further growth in demand, Absa says this could perhaps be explained by some firms producing more in an attempt to catch up on production lost during earlier stricter lockdown levels.

However, despite sharp monthly improvements, some respondents noted that output remained below pre-lockdown levels and this means that, on a yearly basis, official output is still expected to be down in July.

On a positive note, the PMI indicates that respondents reported a slight increase in export sales for the first time since October 2019, meaning that the shape of the gross domestic product (GDP) recovery in Europe, a key market for South African manufacturing goods, will be important for local producers targeting the export market going forward.

On the local front, producers supplying the hospitality sector specifically cited continued weak demand, while those in the alcoholic beverages industry also reported a renewed drop in sales.

The notable rise in the preliminary Eurozone manufacturing PMI during July is positive in this regard, Absa says.

Although, a “very worrying” feature of the latest PMI survey is that the employment index remained particularly weak and, unlike the demand and activity indices, has barely recovered from the sharp plunge in April.

Formal sector employment tends to lag activity trends, and the PMI employment indicator suggests that further job losses are likely after an initial hit to employment expected in the second quarter.

Further, purchasing managers turned slightly more optimistic about business conditions going forward.

The index tracking expected business conditions in six months’ time rose to 51.8 index points in July, and while the PMI says that “this is the best level in a year”, Absa points out that it is still a fairly subdued reading compared to the series long-term average which sits just above 60 points.

After recording two sharp increases, the inventories index also declined in July, with the current level below the average recorded in the first six months of the year.

The supplier deliveries index edged further down in July after reaching a record-high in April, but Absa and the BER explain that this subcomponent is inverted, meaning that if goods are less readily available and purchasing performance worsens, this is normally a sign of increased demand for manufactured products.

“Therefore, such a situation actually lifts the index. However, currently, goods are less readily available [owing] to supply chain disruptions caused by local and global production stoppages and other trade-related disturbances. The still high level of the index in July thus suggests that supply chains are not yet functioning normally.”

After two consecutive increases, the purchasing price index ticked down in July and declined to 72.4 points, which is just above the average recorded in the first six months of the year.