Factories signal recession could be easing

The purchasing managers index (PMI), a reliable health gauge for the economy's second biggest sector, rose to 47.6 from a downwardly revised 45.9 last month — a 16-month peak.

The index is still below the neutral 50 level marking the cutoff between expansion and contraction, which means factory output in SA is lagging a global recovery in the sector.

Similar surveys yesterday showed manufacturing in the US grew for the third month running. In Europe, the sector grew for the first time in 17 months. Chinese manufacturing grew at its fastest pace in 18 months.

But Kagiso Securities fixed-income head Andre Coetzee said manufacturing in SA was still moving steadily back to “expansionary territory”.

“A sustained improvement in global prospects should in the foreseeable future contribute to a return to growth of the SA factory sector,” he said. Kagiso Securities sponsors the index.

Manufacturing accounts for 14% of the economy, and it has been hit hardest by global recession, shrinking a record 22% in the first quarter. SA's PMI has been below 50 since May last year, but is well above a trough at 36.1 hit in April.

Stanlib economist Kevin Lings said: “The recent improvement in the overall PMI manufacturing index is clearly pointing to a meaningful pickup in manufacturing business activity over the next few months.”

Citigroup economist Jean Francois Mercier was also upbeat, but said: “SA industry is still lagging global trends by about three to six months.”

The US index rose to 55.7 last month from 52.6 in September, Europe's PMI rose to 50.7 from 49.3. In China, the index rose to 55.4 from 55.

Lings said he was concerned about the extent of the revision to the past year's PMI after revised seasonal adjustments, which take place every year in September.

Prior data showed that the PMI leapt 8.7 points to 48 in September, its second-biggest rise. Without them the index would have reached 48.9, Kagiso Securities said.

Coetzee said that if the rand sustained a recent “weakening bias” it could also speed up the recovery in SA's manufacturing sector. The rand has given up a chunk of its gains this year, diving 6% to R8.28/ yesterday. It was back at R7.87/ later in the day.

The PMI's expected business conditions component, which rose for seven months running to September, fell to 67.9 from 70.3 last month. Coetzee said that was due to “mixed signals” on the global and domestic data front.

New sales orders jumped to 48.9 from 46.6 while the business activity component crept up to 48.4 from 48 in September.

Inventories fell to 42.9 from 45.5. The employment component rose to 45 from 42, showing factories were still shedding jobs, at a slower pace. Official figures show manufacturing lost 150000 jobs in the third quarter, a fall of 8.8%. The PMI's price index fell to 47.6 from 48.1.

Goldman Sachs said that the downtrend in prices, coupled with “slack” in the domestic economy, could prompt another rate cut in SA in the next two months.

Source: Business Day

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