SA's manufacturing figures drop, raising red flags

The automotive sector has been hard-hit by a drop in manufacturing activity and new car sales, with exports faring worst. Image: BMW

The decline in the Kagiso Purchasing Managers' Index (PMI) points to weak manufacturing production and economic growth in the second quarter.

Adding to the gloomy outlook was a drop in new vehicle sales. The National Association of Automobile Manufacturers of SA (Naamsa) said new vehicle sales in the domestic market fell 9.2% year-on-year last month. Passenger vehicle sales fell 11.3% while vehicle exports fell 40.5%. Naamsa said the figures suggested the country's economy was "losing momentum and risked moving into recession".

The PMI‚ compiled by the Stellenbosch University's Bureau for Economic Research‚ measures activity in manufacturing and is used as a gauge of the country's broader economic health.

The latest Kagiso PMI results come a few days after official data showed manufacturing contracted 4.4% in the first quarter and shaved 0.7 of a percentage point off gross domestic product (GDP) growth in the first quarter.

Several factors were negatively affecting manufacturing output including a 19-week platinum mining strike‚ weak domestic demand‚ and disruptions to electricity supplies.

Big red flag for SA economy

Manufacturing Circle's Coenraad Bezuidenhout says that the declines in manufacturing dampens the outlook for the whole economy for the rest of the year. Image: Manufacturing Circle

The Kagiso PMI fell from 47.4 in April to 44.3 last month - its lowest level since August 2009.

Barclays Africa economists referred to the index's poor performance in the first two months of the second quarter as "a big red flag" for output growth. Although the bank

Manufacturing Circle's Executive Director Coenraad Bezuidenhout said millions of rand in purchases did not occur each day that the strike continued. Local producers who supplied the mining industry were suffering from a loss of income.

He said 70% of platinum group metals were used for industrial applications‚ which meant the strike was imposing supply-side constraints on output.

The business activity and employment sub-indices fell deeper into contraction territory‚ suggesting muted growth. The business activity sub-index fell to 42.5 points last month from 48.5 in April.

Platinum strike continues to harm economy

Chartered Institute of Purchasing and Supply Africa Managing Director Andre Coetzee said the platinum strike was the main reason behind the drop in business activity.

Purchasing and Supply Africa Managing Director Andre Coetzee says that few orders from mines are hurting the manufacturing sector as well. Image: SmartProcurementWorld

"We have a lot of manufacturers supplying the mining sector‚" he said. "A lot of them are not getting business because of the strike and some of them are even closing down."

The weak domestic economic growth and demand environment has also meant limited employment opportunities in big sectors such as manufacturing.

The employment sub-index fell 7.4 points to 37.2 points - its lowest level in five years. This implied renewed job losses in the manufacturing sector‚ according to Kagiso Asset Management.

The new sales orders sub-index rose slightly from 43.5 to 44.8 index points but well below 50 and a reflection of weak domestic demand conditions.

One sub-index‚ however‚ reflected some good news for local producers.

Input cost pressures seem to have abated slightly as suggested by an 8.5-point improvement in the price sub-index to 70.8 last month. The rand has been firmer in recent weeks‚ reducing the costs of imported commodities.

The sub-index measuring expected business conditions in six months' time rose to 59.6 index points from 54.2 in April. Coetzee said this was based on purchasing managers' expectations that the platinum strike will be resolved and that global demand will gain momentum.