SA factory sentiment at decade low - and may get worse

Absa's Purchasing Managers’ Index, compiled by the Bureau for Economic Research, fell to 41.6 from 45.7 in August, the Johannesburg-based lender said in an emailed statement on Tuesday. That’s the lowest level since August 2009. The median estimate of three economists in a Bloomberg survey was 46.5. The gauge has been below 50 for all but one month this year, indicating contraction in the manufacturing industry.

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Key insights

The PMI’s major sub-indexes remained below 50 and show that sentiment in the manufacturing sector will probably deteriorate even more. The gauge tracking expected business conditions in six months’ time declined for a fourth month to 46.1. New-sales orders dropped to 40.7 from 48.5 and business activity declined to 39.3 from 45.8. The sub-index tracking prices rose to 76.7 from 73.6, suggesting that manufacturers’ profitability levels are likely to face increased pressure as a sustained weakness in demand points to little pricing power to pass on the higher costs to consumers, Absa said.

Besides weak domestic demand, the poor performance is due to growing concerns about the health of the global economy and, in particular, South Africa’s trading partners in Europe. The European Union accounts for almost a quarter of the value of South African merchandise exports, according to data from the Stellenbosch-based Tralac Trade Law Centre.

"It is unlikely that the South African manufacturing sector will improve on a sustained basis at a time when our key trading partners are struggling," Absa said.

South Africa’s economy is stuck in its longest downward cycle since 1945, with business confidence at the lowest level in more than three decades.

Market reaction

The rand weakened as much as 1.1% versus the dollar to its worst level since Aug. 30. It traded 1.04% lower at 15.2938 per dollar by 13:35 p.m. in Johannesburg.