October 2019 PMI still stubbornly below 50 neutral mark

Highlights ______________________________________________________________________________________
• The Purchasing Managers’ Index (PMI) for October 2019 improved to 48.1 index points from 45.1 index points reported in September 2019, although still below the neutral mark.
• Four out of five main sub-components improved in October 2019, although all sub-indices are still below the 50 neutral mark.
• Employment expectations remain low due to the weak growth outlook. Meanwhile producer inflation has been subdued and has declined alongside the oil price since it peaked in April 2019.
• High voluntary liquidations in the manufacturing sector in the third quarter of 2019 could be a function of the constrained domestic business climate squeezing out business.
• Although SA’s Global Competitiveness ranking has improved by 7 places to 60, ease of doing business continues to keep SA’s business dynamism low explained by insolvency regulation, extensive red tape when starting a business and rigid labour laws.
• In our view the ebb and flow pattern in the PMI is likely to remain the status quo in the near term, underpinned by the low growth and confidence outlook.

Low growth and sentiment in the manufacturing sector continue to keep employment growth prospects low in the sector. Employment in the manufacturing sector contracted by 30 000 (or 1.6%) in quarter-on-quarter (q/q) terms in the third quarter of 2019, but expanded by 41 000 (or 2.4%) in year-on-year (y/y) terms according to the Quarterly Labour Force Survey (QLFS) released by Statistics South Africa (Stats SA). The manufacturing survey released by the BER showed that employment expectations in the third quarter of 2019 remained unchanged at negative 20 index points. The PMI employment sub-index however improved by 1.8 index points to 42.3 index points in October 2019 (previously 40.5 index points).Producer Price Inflation (PPI) has been favourably subdued dipping below the headline inflation midpoint of the target range (see chart 3). The fall in PPI has coincided with the decline in in the oil price since it peaked in April 2019.Intermediate manufacturing PPI has declined as well and has been below its 5.1% average (calculated from 2012) since July 2019. The index dipped to 0.5% y/y in September 2019 from 1.9% y/y in August 2019.
The PMI price sub-index reversed from its upward trend and shaved off 7.7 index points restoring the index to just below 70 index points from 76.7 index points in September 2019.

The total amount of liquidations rose by 7.9% y/y in the third quarter of 2019 and increased by 13.8% y/y in the first nine months of 2019 according to Stats SA. The number of liquidations in the manufacturing sector in the first nine months of 2019 amounted to 63, while 57 categorised as voluntary liquidations and the remainder compulsory liquidations. The high voluntary liquidations could be a function of the constrained domestic business climate squeezing out business.

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