August PMI decline larger than anticipated

PMIdown_100.jpgThe seasonally-adjusted Absa Purchasing Managers’ Index (PMI) declined to 45.7 index points in August 2019, down from 52.1 in July 2019.

While the magnitude of the decline may have been larger than anticipated, a fall in the PMI in August was not unexpected. This followed on July’s surprisingly solid reading despite the weak domestic demand environment and growing concerns about the health of the global economy.

All of the PMI’s major sub-components came in below the neutral 50-point mark, signalling general weakness in the sector.

For some time, the Suppliers’ Deliveries Index had managed to remain well above 50 index points, providing support to the headline index. However, even this indicator dropped in contractionary terrain in August. This was the first time that this index declined to below 50 since April 2018.

As cautioned in the previous report, the Business Activity Index was unable to hold on to July’s strong gain. The index, nonetheless, managed to stay above June’s reading and the average for the first two months of Quarter 3 of 2019 is well above the level recorded in Quarter 2.

After two consecutive solid increases, the New Sales Orders Index declined again in August. The index slumped back below the neutral 50-point mark to 48.5. Despite the drop, the index remained at a level above that recorded during most of 2019. The index is now more or less in line with the average level of 2018.

Respondents continued to be fairly downbeat about exports for a third straight month, while domestic demand likely also weighed on orders. This negatively impacted output levels, while the sustained weakness in output growth, in turn, affected employment.

The Employment Index fell to a level below 40 points for the first time in more than five years. At 39.1 points, the index is now at its lowest level since May 2014. Barring a single month below 40 points in 2014, the Employment Index is now at a ten-year low.

Worryingly, the index tracking expected business conditions in six months’ time also dipped back to below the neutral 50-point mark for the first time since November 2018. This means that more purchasing managers expect conditions to worsen (from already weak levels) going forward.

After edging above 50 points in July, the Inventories Index slumped back into contraction in August. The index fell by 4.7 points to 46.2 in August. However, despite the decline, the average for the first two months of Quarter 3 was more than 6 points above the level recorded in Quarter 2.

The Purchasing Commitments Index stayed below the neutral 50-point mark for a sixth straight month. The index declined by 2.6 points to 41.5 in August.

Despite the decline in the diesel price in early August, the Purchasing Price Index rose by 5.7 points to reach 73.6 in August – the highest level since March 2019. This increase was likely driven by the sharply weaker Rand exchange rate during the month compared with July.

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