Manufacturing sector likely to remain sluggish

The largest push behind the modest improvement in October came from the more forward looking new sales orders sub-index which rose 1.3 index points to 51.6 in October.

Some economists, however, don't believe there is too much to be optimistic about, cautioning that the manufacturing sector is likely to remain sluggish. Though the PMI employment sub-index also saw a mild improvement, at a level of 45.6 (prior: 43.9), they feel there's also little evidence that the sector is creating employment.

"Although this was the second consecutive month PMI was above the 50 level, the data was still below the strong gains posted in H1:11, indicating that conditions in the manufacturing sector may remain sluggish towards year-end," commented Standard Bank economist Tebogo Mosepele.

"Despite the uptick in the PMI today, we believe that underlying conditions in the manufacturing sector does not inspire optimism. Downside risks posed by the debt crisis in EU (which is the destination for about 26% of our exports) and the slowdown in the US should put pressure on the sector. Further, the global economic prospects are also shaky given the slowdown in PMI for key countries such as the EU, UK and China," Mosepele added.

Mosepele said the relatively weak PMI could raise expectations that the SARB could cut interest rates at their policy meeting next month.

"We believe that there are increasing risks for such an outcome, mainly if incoming data continues to surprise on the downside. However, given upside risks to inflation, we maintain our view that the SARB is likely to keep the repo rate unchanged this year."

On the implications for the rand, Mosepele said the latest PNI supported rand bears.

"Today's PMI confirms that conditions in the manufacturing sector remains weak, thus we view the data as rand negative, as it implies that SA economic activity may be sluggish at the beginning of Q4:11. The data, coupled with increased global risk aversion and hopes for a further interest rate cut may support rand bears over the short-term."

Though four of the five sub-components of the headline PMI remained above the neutral level of 50, they hardly showed evidence of significantly improved activity in South Africa's manufacturing sector, according to Absa Capital economist Jeffrey Schultz.

The fact that manufacturing production levels are still operating at around 13% below their pre-crisis peaks and that manufacturing production momentum remains in negative territory (-7.7% q/q saar as of August) and looks set for another negative quarter of growth (Q3), supports this view.

"More encouraging however is the fact that the PMI leading index (new sales orders as a ratio of inventories) has reached its highest level since May and should indicate a slightly better final quarter for Q4 manufacturing prospects. Going into the final months of 2011, we will continue to monitor high frequency supply-side data closely in order to gauge whether or not there are downside risks to our H2 GDP growth trajectory. We maintain our 3.1% average GDP growth forecast for 2011," said Schultz.