Glimmer of hope for SA's factories as decline slows

The Investec purchasing managers index (PMI) — a reliable health gauge for the economy's second-biggest sector — slipped to 35.6 from 36 in March.

Local manufacturing has been hit hard by the global recession, and contracting for 12 months running, the survey shows.

But business expectations improved markedly, in line with similar surveys released worldwide yesterday. There was also a pick-up in activity and sales orders, suggesting that lower interest rates may be starting to buoy domestic demand.

“The latest readings provide some evidence that the severe downward pressures impacting the manufacturing sector are showing signs of moderation,” said Mokgatla Madisha, portfolio manager at Investec Asset Management.

“While most indicators remain in deep negative territory, we take some comfort from the fact that they seem to be stabilising.”

That could be good news for SA's economy, which shrank for the first time in a decade during the final quarter of last year, mainly due to plunging factory output.

Analysts expect an even steeper contraction in the first quarter of this year, as official data so far show both factory production and retail sales falling at a record pace.

The big question is whether conditions in SA and abroad will improve in coming months.

Yesterday's figures suggest the global downturn may be easing, with Europe's PMI at a six-month peak. Surveys in China and India showed a rise in factory output.

For SA's manufacturing sector to stage a real recovery, there would have to be an economic rebound in its main trade partners, Britain, the rest of Europe, and the US. Fitch ratings agency said last month the global downturn was taking a rising toll on demand for SA's manufactured exports, and a recovery was unlikely before 2011.

Madisha warned that signals were still mixed from the local PMI survey, conducted by the Bureau for Economic Research (BER). “The sharp drop in inventory, purchasing commitment and employment indices clearly indicate continued weak demand and an uncertain outlook for the sector.”

SA's factory output dived in February — a record 15% lower than that of the previous February. It shrank 22% in the fourth quarter of last year. Analysts fear an even worse performance in this year's first quarter.

BER economist Christelle Grobler said: “The risk is the contraction might be even larger than before. But most of the pain is likely to be felt in these months. At some stage production has to stabilise.”

The business expectations component of the PMI, which looks six months ahead, rose to 48.3 from 46.6 in March. It was at 8.3 in February, and is well off the record low of 29.9 reached in November.

The PMI survey measures sales orders and expectations among buyers of supplies for factories. A reading below 50 points to a contraction in output, and a reading above indicates an expansion.

“The fact remains that the message is very mixed,” said Citigroup economist Jean-Francois Mercier. The employment component of PMI retreated further, to 36.2 from 39.2 in March, which points to further pressure on jobs in the sector.

Rand gains pose another threat to a recovery in manufacturing, which makes up 16% of SA's overall economic output. The rand has rallied 14% so far this year, and reached a seven-month peak at R8.29/$ yesterday. Its strength makes inputs for SA's factories less expensive, but also makes exports less competitive.

“The depreciation of the rand last year was offering a bit of a buffer against the decline in export demand, but that has been taken away,” Mercier said.

BER figures show that as the rand weakened over the past five years, the ratio of local manufactured goods exported rose to 30% from 21%.

Source: Business Day

Published courtesy of