Early signs of a mild recovery in SA’s manufacturing sector

Manufacturing sentiment settling in positive territory for the second month in a row

The Absa/Bureau of Economic Research (BER)Purchasing Managers’ Index (PMI) inched 1.6 index points higher to 52.5 points in February 2017, remaining in positive territory for a second consecutive month. The last two readings, which are showing early signs of a tepid recovery in SA’s manufacturing sector should,nevertheless, be treated with caution. The last six-month average (48.8 points) in the headline print remains below the prior six month average of 51.3 points, signalling fragile momentum in manufacturing confidence levels.Despite positive global growth surprises (which could boost SA’s exports) and a stabilisation in commodity prices (likely to drive further gains in down- and upstream industries in SA’s manufacturing industry), the BER has warned that recent tax increases announced in the 22 February budget speech could dampen consumer spend and have a negative knock-on effect on new sales orders in the manufacturing sector (see chart 1).


The rise in the new sales orders sub-index from 50.4 to 55.7 points acted as the largest positive contributor to the improvement in the overall PMI reading (see chart 2), while negative readings on the intention to increase hiring in the manufacturing sector detracted from the increase in the headline figure.


Input costs could rise into April 2017

The relationship between the PMI price sub-index and inflation at the factory gate points to further downside in input costs. The price sub-index dropped from 72.4 to 68 index points in February 2017 (see chart 3), notably below the last twelve-month average of 73.1 points. Despite international oil prices ticking higher, a firmer currency prevented an increase in rand oil prices in the past month, which resulted in a marginal price cut.

chart 3-1However, the budget announced a 30c/l increase in fuel levies and a 9c/l increase in the Road Accident Fund to be introduced in April 2017, which could push up input costs for manufacturers. In the medium term, a partial reprieve has been granted by the National Energy Regulator of South Africa, NERSA, which has granted Eskom a 2% electricity tariff increase for 2017/18. Electricity inflation at the producer level has averaged 11% (year on year) y/y since 2013 (see chart 4).

chart 4-1

Positive global manufacturing trends

Globally, manufacturing production has had a decent start to the year. In the United States (US), the Insitute for
Supply Management (ISM) data on the manufacturing sector showed that US manufacturers are intent on increasing production. Political changes have had little negative effect on manufacturing sentiment and business
conditions. In January 2017, the ISM Manufacturing Index rose to 56 points, indicating a healthy expansion in the US economy. The employment sub-index registered an increase in hiring for the fourth consecutive reading in January 2017, while raw material prices continued to rise, boding well for a sustained increase in consumer price inflation towards the US Federal Reserve’s 2% inflation goal. The recovery in manufacturing activity in the Eurozone continued in February 2017, with the (flash) manufacturing PMI increasing to 55.5 points from a prior reading of 55.2. A weaker euro bolstered export orders to their highest level in nearly six years.
Although the manufacturing PMI in the United Kingdom(UK) bucked the trend of firmer global data, slipping from 55.7 points in January to 54.6 points in February 2017, the manufacturing sector is still on track for a solid first-quarter contribution to overall growth. New orders have slowed, however, export orders have experienced a recovery (thanks to sterling weakness). The strength in economic activity will, however, depend on growth in the service sector, given that manufacturing only accounts for around 10% of total UK GDP. Manufacturing sentiment in China continued to surprise to the upside. The manufacturing PMI rose to 51.6 points in February 2017, consistent with a robust uptick in growth for the first quarter of the year. Nonetheless, strong growth momentum is unlikely to be sustained for the remainder of the year. Despite a sturdy upswing in the manufacturing PMI since the start of 2016, Deutsche Bank has shown that a negative credit impulse points to downside risk in PMI data in upcoming months. Moreover, real estate and private fixed investment growth has started to slow. Authorities have signalled that they are comfortable with a slower pace of economic activity, in line with their agenda to increase the economy’s growth reliance on consumption and services, away from the traditional sources of growth, namely exports and infrastructure. Momentum Investments expects growth in China to taper off from the 6.7% print registered in 2016 to below 6.5% in 2017.

-Herman Van Papendorp( Head of Investment Research and Asset Allocation) and Sanisha Packirisamy (Economist)

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