South Africa’s seasonally adjusted purchasing managers index (PMI) rose slightly in May to 56,4 from 56,2 in April after surging to 57,9 points in March from 52,6 in February.
“The index remains well above 50, consistent with a sustained expansion in the manufacturing sector,” said André Roux, head of fixed income at Investec Asset Management.
The PMI is an index modelled on the Institute of Supply Management index of the United States, which measures manufacturing activity. The break-even level is 50, so a reading above 50 implies expanding manufacturing activity.
The research is conducted on a monthly basis by the Bureau for Economic Research at the University of Stellenbosch in conjunction with the Institute of Purchasing and Supply South Africa.
The revamped manufacturing production statistics released by Statistics South Africa, which showed a 9,5% quarter-on-quarter seasonally adjusted annualised increase in the first quarter, provided the first hard evidence of the sector’s performance during the first quarter of 2004, confirmed the onset of the recovery in manufacturing and were very much in line with earlier PMI data, Roux said.
“The April and May readings suggest that the manufacturing recovery strengthened further during the second quarter. It is likely that the improvement in domestic demand remains the strongest driver at this stage,” Roux said.
According to Roux it also appears that strong domestic and foreign demand are overtaking the negative impact of the strong rand on manufacturing activity.
While output activity and inventories increased, new sales orders declined from 62,2 to 58,8 in May, indicating some softening in demand conditions during May.
“However, the new orders index remains at a high level, pointing to firm underlying demand,” Roux said.
Particularly noteworthy was the increase in the seasonally adjusted employment index, which rose to 56,4 from 54,6 in April.
“Manufacturers appear to have adjusted to the impact of the strong currency and the pick-up in the level of business activity is giving them an opportunity to embark upon expansion in employment. Both fixed investment and employment prospects are promising,” Roux said.
The PMI price index increased further in May to 66,7 from 64,5 in April. Roux said this means that producer inflation is likely to pick up in the months head.
Last week Statistics South Africa release the April producer price index, which showed a 0,2% year-on-year decline. This was the eighth consecutive month that that there has been producer deflation in South Africa, the longest period of deflation since the 1930s Great Depression.
“During the currency-induced inflation spike at the end of 2001, the PMI price index also led the actual PPI inflation rate by three to four months. It appears that a similar pattern is currently forming,” he added.
Purchasing managers’ short-term expectations appear to have stabilised for the moment, although they remain favourable overall.
The gross percentage of respondents expecting an improvement in general business conditions in six months’ time increased from 50% to 53%. However, the share of respondents expecting a deterioration also increased, up from 7% to 10%. — I-Net Bridge