PMI at 15-month low as firms continue to cut jobs

Cape Town - Operating conditions at South African private sector companies deteriorated at the strongest rate in 15 months as new orders declined at a sharper rate, the Standard Bank SA Purchasing Managers' Index (PMI) showed on Wednesday.

The PMI, a composite index calculated as a weighted average of five individual sub-components - new orders (30%), output (25%), employment (20%), suppliers’ delivery times (15%) and stocks of purchases (10%) - fell from 47.9 in September to 47.5 in October, signalling a further deterioration in business conditions.

The PMI has now posted below the crucial 50.0 mark for five months in a row. Readings above 50.0 signal an improvement in business conditions on the previous month, while readings below 50.0 show a deterioration.

Private sector companies reported a sharp drop in output amid an accelerated decline in new business. Moreover, the companies continued to shed staff and lowered their purchasing activity further.

According to the PMI, input and output prices both rose sharply despite average staff costs increasing at the slowest pace in the survey's history.

Meanwhile, companies raised their charges further.

“The continued decline of the PMI in October has been despite a drop-off in days lost due to load shedding and is therefore all the more concerning," said Standard Bank economist Kuvasha Naidoo.

He said output has been in contraction for six consecutive months and producers' intentions to downscale are evident in their decision to reduce employment.

"This is the first time in the survey’s history that the Employment Index has been below 50 for two consecutive months. Importantly, the shedding of jobs is not due to wage increases and coincides with average staff costs increasing at the slowest pace in the survey’s history," Naidoo said.

Naidoo said employment tends to emulate new orders and that new orders have fallen 6.1 points since March. Employment started to moderate in May and has lost 3.5 points so far.

“Businesses have been destocking for four consecutive months. Due to the decline in new orders having outpaced the rate of destocking, the leading PMI indicator (ratio of new orders to inventories) remained below the 1.0 mark.

“Through most of the history of the survey, output prices have remained below purchase costs, implying persistent margin pressure. Interestingly both price indices have trended lower since peaking in February 2014, despite a weakening currency.”