July PMI reaches 51.5 − manufacturing “off to a good start” in Q3

The seasonally-adjusted Absa Purchasing Managers’ Index (PMI) rose to 51.5 index points in July, up from 47.9 in June. The current level is comfortably above the neutral 50-point mark and is supported by four out of five key sub-components being in positive terrain.

“This suggests that the manufacturing sector got off to a good start in the first month of Q3 of 2018”, said the Bureau for Economic Research, who conducts the survey.

The recovery was driven by an improvement in demand, as reflected by an increase in the New Sales Orders Index, which rose to 52.8 index points in July. This is slightly above the average recorded in Q2 of 2018 and reverses June’s losses.

Albeit relatively volatile, the New Sales Orders Index has so far performed significantly better in 2018 when compared with the second half of 2017.

The uptick in demand filtered through to higher business activity (increased by 4.5 points to 50.3), which pushed the Output Index above 50 points for the first time since February. This, in turn, contributed to the 4.8-point increase in the Employment Index (now at its highest level since early 2016).

However, despite the Inventories Index rising to 48.5 points in July, it remained below the neutral 50-point mark – a level it has held for 16 consecutive months.

While current conditions seem to have improved, purchasing managers have turned very pessimistic about expected conditions going forward (compared with historic levels). The index tracking Expected Business Conditions in six months’ time declined to 48.7 points in July from 55.7 in June. This is the first time since August 2017 that manufacturers expect conditions to deteriorate going forward instead of improving.

This is partly because current conditions are (according to the PMI survey) better than they have been in recent months, so an improvement from this elevated level may be less likely than from previous tougher conditions. Furthermore, prospects for exporters may be more subdued, owing to concerns about the potential negative impact on global growth from the wave of US trade protectionism.

Manufacturers are also battling with increasing cost pressures. The Purchasing Price Index rose sharply for a second consecutive month. At 83.6 points, it is almost 20 points above May’s reading of 65.5 points and is at its highest level since early 2016. A key driver of the recent upward trend has been several straight months of hefty fuel-price increases. Fortunately, the fuel price remained virtually unchanged at the beginning of August. On average, the Brent crude oil price and Rand exchange rate stayed broadly the same compared with the previous month.

The Purchasing Commitments Index edged marginally lower to 44.6 index points in July after remaining unchanged at 45 points in June.

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