After languishing in contraction mode for nine successive months, the Absa Purchasing Managers’ Index (PMI) for the manufacturing sector has been above the neutral level of 50 since May. At an index level of 57.3, the August PMI recorded its highest level since March 2007.
The Absa PMI is compiled by the Bureau for Economic Research (BER) at Stellenbosch University and the methodology that is utilised means that an index score of 50 represents a neutral level of manufacturing activity, with any score above 50 indicating increased activity and vice versa.
Significantly, the key sub-indices for business activity and new sales orders both increased to new record highs, namely 67 and 71.1 index points, respectively.
Although this recovery of manufacturing activity in South Africa has followed the general upward trend of several other key economic indicators since the disastrous month of April, the extent of the renewed manufacturing confidence has caught economists by surprise.
Closer scrutiny of related indicators nevertheless provides an important clue to the new-found optimism amongst the country’s manufacturers.
IMPORT REPLACEMENT
There seems to be a close inverse correlation between the PMI’s sub-index for new sales orders and the level of imports of manufactured products. During the four months between April and July 2020, the cumulative value of imports declined by 32%, compared to the same period last year.
This decline represents a value of almost R140-billion, which has obviously created unique import replacement opportunities for local manufacturers. The global enforcement of lockdown regulations has obviously hampered international trade flows and domestic producers seem to have filled to some extent the void caused by the resurgence of domestic demand for both final and intermediate goods.
It also seems clear from the fairly dramatic resurgence of the Absa PMI that manufacturers were convinced of the short-term nature of the Covid-related contraction. This is reflected in the April PMI only declining to 46.1 and bouncing back to above 50 in the following month, where it has remained.
It is interesting to note that the decline in the PMI as a result of the lockdown was not remotely as severe as during the previous recession, when it dropped to a score of only 38.4 (in April 2009).
Absa has welcomed the recovery of the PMI to well above pre-pandemic levels, but has noted that actual manufacturing output data for August may not necessarily reflect the same extent of recovery.
Although production levels in some subsectors are already on par with pre-pandemic levels, a combination of restrictions placed on the manufacturing sector until recently, combined with social distancing protocols that remain in place, will prevent some factories from returning to full capacity in a hurry.
FUTURE PROSPECTS ALSO SOUND
Absa notes that the latest increase provides evidence that purchasing managers have turned notably more optimistic about the future, with the sub-index tracking expected business conditions in six months’ time having risen to the highest level in 18 months.
South Africa’s Finance Minister and other members of the team tasked with assisting and expediting post-Covid economic recovery, would have been delighted with the improvement in manufacturing confidence, as well as with the robust trade balance surplus.
Government now has an opportunity to assist the local manufacturing sector in its quest to consolidate the output gains resulting from a degree of import replacement.
Modest quotas on cheap Chinese imports that fall under the category of "dumping" (by virtue of fiscal subsidisation) would go a long way to continue expanding the output of South African factories.
Dr Roelof Botha, Economic Advisor, Optimum Investment Group
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