/ 1 April 2008

PMI shows factory activity near five-year low

South Africa’s manufacturing sector contracted in March at the sharpest pace in nearly five years, knocked by slowing economic growth and high costs, a survey showed on Tuesday.

The overall index from the purchasing managers’ survey dropped further below the 50 divide between growth and contraction to 43,7 in March, its lowest level since June 2003, as both output and new sales orders shrank. February’s index reading was 46,4.

The fall shows the second largest sector in Africa’s biggest economy under pressure from easing consumer demand due to higher interest rates, continued strong inflation and a national power shortage.

”The underlying figures paint a deteriorating picture of business conditions in the manufacturing sector,” said Andre Roux, head of fixed income at survey sponsors Investec Asset Management.

”Given limited prevalence of power outages during the month, the decline is a result of the weaker real economy and high input cost inflation on the manufacturing sector,” he said in a statement.

South Africa’s central bank raised its repo lending rate by a total four percentage points between June 2006 and December last year before leaving it unchanged at 11% in January.

The higher borrowing costs have cut into consumer spending, evident in sharply lower new vehicle sales and slower retail sales, but inflation remains on the boil.

The CPIX inflation gauge hit a five-year high of 9,4% year-on-year in February, far outside the central bank’s 3% to 6% target range. That spurred talk rates may have to rise again next week, which would further damage demand.

Investec said contraction in both output and new sales orders persisted, with the business activity index falling to a record low of 38,5 while input prices climbed.

The new sales order index declined to 44, in line with readings in 2003, when the manufacturing sector was in recession.

The latest official data, for January, showed the sector growing by an unadjusted 1,4% year-on-year.

Investec said the PMI’s input prices index increased to 90,7 in March from 86,8 the month before, suggesting inflation still hasn’t peaked, while the employment index dropped to 42,9, pointing to companies shedding jobs rapidly.

”Furthermore, purchasing managers’ medium-term expectations have reached a further low over the month,” Roux said. – Reuters