February PMI above 2015’s Q4 average

South Africa’s Purchasing Managers’ Index (PMI) increased to 47.1 index points in February 2016, up from 43.5 in January. The highest level since October 2015, the index is now above the average recorded in 2015’s fourth quarter (Q4) of 45.6 index points.

Despite remaining below the neutral 50-point mark for a seventh straight month, there were some encouraging signs in the underlying results. The improvement in the headline index was driven by increases for three of the five subcomponents, said the Bureau for Economic Research (BER).

The relatively broad-based increases were mirrored in purchasing managers’ estimations of expected business conditions in six months’ time, which were less pessimistic: the expectations index increased by 5.4 index points to 44.8.

The PMI leading indicator nudged back above 1 for the first time in more than two years, owed to the new sales orders index edging above the inventories index, which suggests production could pick up in coming months, noted BER.

However, these are only tentative signs that manufacturing output could pick up from a quarter-on-quarter contraction recorded in Q4 2015. The sector still faces significant headwinds, most importantly persisting weak demand.

Furthermore, producers have to manage mounting cost pressures as the price index rose to 90.7 from 86 in January. This index is significantly (30 points) above the level recorded twelve months ago. The sharp increase in the price index was mainly on the back of the significantly weaker rand exchange rate, which pushed up the cost of imported raw materials and intermediary products. Conversely, the depreciated currency has not yet boosted export performance in any significant way, noted BER.

However, encouragingly, some respondents indicated that import substitution is helping domestic orders.

Importantly, the slight improvements observed in February’s PMI survey will need to be sustained going forward before the sector posts meaningful growth. Only if demand picks up on a sustained basis will production and, subsequently, employment be pulled higher as well.