Kagiso PMI for August up 4.3 points to 56.5

At 56.6 it is the index's highest level since August 2007‚ just before the international recession hit SA's economy.

The monthly Kagiso PMI is a leading indicator of activity in the manufacturing sector‚ where a level below 50 suggests a contraction in activity while that above 50 points to expansion.

According to sponsors Kagiso Tiso Holdings‚ the index has now been above the key 50-point mark for five consecutive months.

Kagiso asset management head of research Abdul Davids said all of the major PMI sub-components improved‚ with the business activity and new sales orders indices making the largest contributions to the overall increase.

"The business activity index increased sharply in August following a minor pullback in July to reach 59.2‚ indicating that pressure on manufacturing output might be abating‚" said Davids.

The new sales orders index of the PMI rose by 2.5 points to 57.5 in August‚ suggesting that the demand for manufactured goods had improved.

Outlook improving

"Although conditions in the eurozone region are improving‚ they remain tough and the improvement in demand is therefore more locally driven‚" said Davids.

"We may be seeing the first signs of import replacement as the weaker rand improve the competitiveness of locally manufactured goods‚ versus more expensive imported goods‚" he said.

Davids said the sustained weakness in the rand against major currencies had improved the global competitiveness of local exports of manufactured goods.

The employment index surprised analysts by increasing to 51.2 points from 47.5 in July - the first time since November 2012 that the index had risen.

But despite the improvement‚ Davids cautioned that manufacturers remained reluctant to increase production capacity until sustained demand-side improvements emerged.

The price index remained relatively stable at a high level of 87.2‚ indicating persistent input cost pressures.

"The upward price pressure faced by manufacturers for most of this year is mainly due to higher fuel‚ electricity and labour costs and the sharp increase in PPI from 5.4% in May to 6.6% year-on-year in July corroborates this‚" said Davids.

According to Davids‚ the latest PMI results showed that both demand and operating conditions within the South African manufacturing sector had improved.

In addition‚ the outlook for the sector was also looking more positive‚ with the index measuring expected business conditions in six months' time increasing by 2.8 points to 55.8.