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Cape Town - Business activity - like new sales orders - in South Africa's manufacturing industry is likely at its worst level since the third quarter of 2009, Sanisha Packirisamy, economist at MMI Investments and Savings, said on Monday.
The business activity sub-index of the latest Barclays/BER Purchasing Managers’ Index (PMI) fell by a further 4.9 index points to 37.2 points in January. The BER attributes this poor reading to persistently weak demand levels and a further rise in input cost pressures.
"Mounting consumer headwinds including rising interest rates, falling real wage growth and dismal employment prospects highlight further weakness in domestic demand," said Packirisamy.
"Despite a sharp 24% depreciation in the rand (on a trade-weighted basis) over the past twelve months, weak global trade activity and rising input costs pose challenges to a faster recovery in external demand."
The index as a whole dipped below what she calls the "all-important" 50 mark for the sixth consecutive month.
In her view this indicates that production in SA’s manufacturing sector continues to face challenging conditions and the outlook for the sector remains poor.
"Even in the absence of electricity load-shedding, the headline figure struggled to move into expansionary territory and instead dipped 2 points to 43.5 in January from 45.5 points in December 2015," said Packirisamy.
READ: Manufacturing production dropped by 1% in November
The PMI price index jumped 9 index points to a reading of 86 index points in January. This was on the back of rising imported raw material costs and intermediate products. According to Packirisamy, this points to a further likely acceleration in producer price inflation.
"In addition, the weaker currency has also partly negated the recent steep decline in Brent crude oil prices which has further fuelled the rise in the PMI price sub-component despite both Opec (the Organisation of the Petroleum Exporting Countries) and non-Opec producers increasing supply and keeping a lid on international oil prices," she explained.
"The earlier effects of severe drought conditions, low commodity prices and anaemic global trade activity are likely to limit the growth contribution from the agricultural, mining and manufacturing sectors of the SA economy."
The employment indicator of the index dipped to 45.4 index points in January from 46.5 in December 2015, remaining below the 50-mark since the first quarter of 2014.
In Packirisamy's view, it is likely that elevated nominal wage settlements and labour market tensions have continued to deter an increase in hiring, while fragile demand (both locally and globally) has played a further role in dampening capital investment spend and jobs growth in the sector.
She pointed out that SA's manufacturing industry is underperforming global trends, which indicate that global manufacturing sentiment remains intact.
