PMI plunges as manufacturing demand and activity deteriorates

02 March 2015

The seasonally adjusted Kagiso PURCHASING MANAGERS’ INDEX™ (PMI™) fell by a steeper-than-expected 6.6 index points to 47.6 in February 2015, signalling that the manufacturing sector is taking strain.  A 16.2 point decline in the Business Activity Index (to 45.5) was the main driver of the fall in the headline index. According to Abdul Davids, Head of Research at Kagiso Asset Management, January’s figure was artificially high due to seasonal factors and a decline was expected in February, albeit not of the magnitude that was recorded.

“The Business Activity Index has been very volatile since October 2014, swinging by an average of 10.8 points from month-to-month,” says Davids. “This reflects the uncertainty and volatility of the underlying environment as the timing and frequency of load-shedding is unstable. This will remain a key constraint in the manufacturing sector as interruptions in electricity supply affects manufacturers’ ability to produce and directly dampens domestic demand.”

Over the period, the New Sales Orders Index fell by 4.4 points to 49.3. Davids points out that this decline was likely driven by domestic factors as the global manufacturing picture improved during February. The Employment Index slumped even further and is now at 43 index points. While the Inventories Index declined from its exceptionally high level in January, at 53.3 it remains in positive territory.

The Price Index continued to signal a slowdown in the rate of increases in input costs. The index measured 60.4 points, which is more than 30 points below the level recorded a year ago. However, Davids cautions that the Price Index (and actual producer price inflation) could bounce back in coming months. “The oil price picked up during February and this, coupled with a weaker rand exchange rate, means that petrol and diesel prices will rise by 96c/litre and 74c/litre respectively on Wednesday,” he says. “A further increase is expected in April on the back of the higher fuel levy and the increase in the contribution to the Road Accident Fund. In addition, electricity prices will rise in the coming months, which suggests that input cost pressures could intensify for manufacturers going forward.”

Yet despite current setbacks, purchasing managers remain surprisingly optimistic about the future as the index measuring expected business conditions in 6 months’ time only fell to 64.4 from 66.9 index points. Despite the fall in new sales orders, the PMI leading indicator nudged up. However, the indicator remained below 1, which suggests that a quick output recovery is unlikely.