December PMI down by 1.6 points

The seasonally adjusted Barclays Purchasing Managers’ Index (PMI) declined to 46.7 index points in December 2016 from 48.3 in November.

This means that the manufacturing PMI remained stuck below the neutral 50-point for a fifth straight month.

This is in stark contrast to the sustained upward momentum seen in global PMI figures since mid-2016. In the US and the Eurozone, manufacturing PMI readings came in above 54 index points in December. The most recent Chinese PMIs are also pointing to accelerating output growth.

In all likelihood, the key reason why the South African manufacturing sector is underperforming is the persisting weakness of domestic demand.Key supply constraints (most notably load-shedding and strike activity) actually moderated through 2016.

A recovery in agricultural output and an uptick in the mining sector on the back of higher commodity prices could support demand going forward. However, this could be offset by the outlook for the local consumer which is more downbeat.

On a positive note, the uptick in global industrial activity could benefit local manufacturers targeting the export market in coming months. Four of the five major subcomponents of the PMI remained below 50 points in December.

Most notably, the index measuring suppliers’ performance slumped to a historic low of 40.9 from 48 index points in November.This reflected the broad-based weakness of the domestic economy as it implies that suppliers are operating way below capacity.

The business activity index fell by 2.6 points to 46.3 in December – the sixth straight month that the index reflects a decline in output.

Encouragingly, the new sales orders index managed to stay just above 50 in December (50.9), likely lifted by continued export orders.

The inventories index declined for a third month, keeping it well below the new sales orders index. This meant that the PMI leading indicator remained above one, suggesting that output growth could pick up as demand outstrips inventories.

Manufacturers were also relatively optimistic about expected business conditions in six months’ time, albeit that the index fell slightly from 53.9 to 53.2 in December.The purchasing price index remained unchanged at 65.6 index points in December. While the rand exchange rate was slightly stronger compared to November, this was countered by a sharp rise in the Brent crude oil price.

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