Slowing demand and heightened load shedding have seen manufacturing activity in South Africa remaining largely flat albeit at a seven-month high at the beginning of 2023.
However, manufacturers are expecting business conditions in six months’ time to improve significantly as the global economy looks set to weather the storm of a deep recession.
The seasonally adjusted Absa Purchasing Managers’ Index (PMI), released yesterday, came in at 53.0 index points in January, virtually unchanged from 53.1 points in December 2022.
The PMI – conducted by the Bureau for Economic Research (BER) on behalf of Absa – was ahead of consensus expectations of 52.1 points.
This latest reading pointed to the third successive month of modest expansion in manufacturing activity, supported by growth in business activity and inventories in January despite rolling power cuts.
In January, Eskom implemented rotational power cuts right through the month, sometimes up to stage 6 load shedding, due to a number of unplanned breakdowns of its coal fleet.
Absa said that the business activity sub-index moved into expansionary territory, gaining a notable and a surprising improvement of 10.8 points following a poor ending to a dismal year.
This was despite many respondents still flagging load shedding as holding back production and new sales orders dipping lower in January.
Absa’s senior economist, Miyelani Maluleke, said should this translate into actual production growth, it would be a promising start to the year for the struggling sector.
Maluleke warned that while this was encouraging, it remained to be seen whether this can be sustained in coming months with persistent load shedding weighing on production potential.
“Continued activity growth would require a sustained improvement in demand and most likely a move to less intense stages of load shedding,” Maluleke said.
“In this regard, the increase in the expected business conditions index was encouraging. The index tracking expected business conditions in six months’ time rose by 8.9 points to 63.8 – the best level since early 2022.
“Given the poor potential for the domestic economy to accelerate demand growth for factory goods, this was likely driven by better expectations for the global economy.
“There are more signs of the European economy avoiding a near-term recession and the reopening of the Chinese economy providing a further boost to global demand.”
The new sales orders index dipped lower in January due to weaker domestic demand after proving surprisingly resilient in the final two months of 2022.
Following an unexpected surge to 54.3 points in December, the employment index dipped back below the neutral 50-point mark in January, suggesting that any improvement in staffing levels at the end of the year was temporary.
The purchasing price index booked its biggest increase since March 2022 following a steady decline, as the rand exchange rate was on average slightly stronger to the dollar compared to December, though the Brent Crude oil price was higher.
According to Investec economist Lara Hodes, heightened load shedding continued to be a drag on confidence and, therefore, investment potential.
Moreover, Hodes said consumers remained constrained, contending with still elevated inflation and high interest rates.
“The strong pick-up in the index measuring business expectations in six months’ time, it reached the best level since early 2022, is thus unlikely to be underpinned by domestic demand conditions and rather by expectations of a more favourable global economic environment than was previously envisioned,” Hodes said.
“The purchasing price index, although it is still trending below the long-term average, increased by 4.5 points to 69.3. Persistent load shedding, with producers having to run expensive diesel-powered generators, continues to weigh on their overall cost base.”
BUSINESS REPORT