Manufacturing backdrop darkens

There have been murmurings of an export-led revival in SA - but that came after it emerged last month that total manufacturing activity had grown by 8.9%.

But late last week it emerged that the PMI has dipped below the 50 growth mark to 48.4 - the worst fall in the current cycle.

Economists now expect this week's manufacturing data for May to decline to around 6.5%, but even worse, to draw down second quarter GDP growth.

Jean Mercier, economist from Citibank in SA, says the fact that the business activity sub-index fell more than other components may be an indication of some downward distortions related to temporary factors (the May Transnet strike, World Cup-related absenteeism).

But a more important explanation may just be the downscaling of manufacturers' business expectations after relative - but excessive - optimism earlier in the year.

On the defensive

"For now, manufacturers are back in defensive mode - reluctant to hire, invest and rebuild inventories.

"This means stagnant output in the sector and a likely slowdown in Q2 GDP growth on a quarter-on-quarter basis, despite the World Cup.

"It also suggests that the SARB will retain a dovish stance at the next MPC meeting," he says. The next meeting takes place on 22 July and there have been calls for one more rate cut in the cycle to spur the economy.

Kevin Lings, economist from Stanlib, says excluding the impact of the World Cup, there is probably an underlying fall-off in industrial activity given SA's relatively sluggish export performance (especially given the difficulties in Europe) as well as an important normalisation of the inventory cycle.

"This would suggest that while industrial activity should improve a little after the World Cup is concluded, it is unlikely to quickly move back to the levels recorded in the early part of 2010."

Slowing growth

Absa Capital feels the disappointing PMI figures continue to suggest the robust growth the sector has enjoyed in recent months seems to be slowing down.

But they do not hold the view that the dip in the June PMI indicates that the sector's recovery has been tarnished.

"We still hold a relatively optimistic view on global growth, while demand (both domestically and globally) also seems well on its way to recovery.

"These factors, in our view, should remain supportive of a recovery for the industry (albeit at a slower pace) for the remainder of 2010."

Bad tumble

The PMI declined for the fourth consecutive month in June, but this was the worst fall in the current cycle as the index dipped below the critical 50 mark to 48.4.

Put starkly, this is the first reading of less than 50 since October 2009 - 50 and above is the barometer for when the sector is growing.

The reading may seem at odds with actual manufacturing production data from Stats SA, which was reported to have grown by 8.9% year-on-year in April.

But in order to better understand the industry trend you need to annualise it over a slightly longer timeline, which shows that there has been a sharp slowdown from 13.2% in January to 2.4% in April.

What makes last weeks's reading all the more dreary is that it was at a peak of 60.4 in February.

The poor global demand thread was also evident today and likewise paints a concerning picture for the future - Europe is SA's largest trade market from an investment perspective - the euro area manufacturing PMI was confirmed at 55.6 in June, down from 55.8 in May.