June PMI falls further, dragged by sentiment around expected business conditions

The seasonally-adjusted Absa Purchasing Managers’ Index (PMI) fell further below the neutral 50-point mark in June. The index lost 1.9 points to reach 47.9, down from May’s 49.8 points. The dip means that the average level recorded during Q2 of 2018 is only 0.3 points above Q1 of 2018’s average and still below the key 50-point level. This suggests that the sector is unlikely to stage a solid recovery after output contracted on a quarter-on-quarter basis in Q1 of 2018.

“Arguably, the most disappointing result of the survey was another marked decline in the index-tracking expected business conditions in six months’ time”, said the Bureau for Economic Research (BER) in its PMI statement. “The index declined for a fourth consecutive month to reach 55.7 in June, which is a staggering 23.4 points below the multi-year record high level of 79.1, recorded in February 2018, and below the average level recorded in 2017”, said BER.

Several factors may have dampened optimism over recent months. Perhaps the most important is a concern that the uptick in demand (based on the New Sales Orders Index) in Q2 may not be sustained. Furthermore, the return of load shedding in recent weeks may also have been a specific dampening factor in June.

For companies focusing on the export market, concerns about an intensification of the trade war between the United States and the rest of the world could also explain the more muted expectations.

Finally, rising cost pressures may also have weighed on expectations – the Purchasing Price Index surged to its highest level recorded thus far in 2018. It must be noted, however, that the current level of the Expected Business Conditions Index still means that respondents expect conditions to improve from the current weak environment – but significantly less so than before.

All but one of the five sub-components of the headline PMI were below the neutral 50-point mark in June – the exception being the Suppliers’ Deliveries Index, at 51.5 points.

The Business Activity Index moved lower for a second month, driven by the downtick in demand (but the movement was less than in May) and shedding a further 1.4 points to 45.8 in June. With the exception of January and February 2018, this index has been in negative terrain for more than a year. “The current level is the lowest since December 2017, which does not bode well for a recovery in output growth”, said BER.

The New Sales Orders Index dipped back below the neutral 50-point mark in June after two months in positive terrain. Having lost 2.4 points to reach 49.1, the current level is in line with the average recorded in Q1. However, owing to the relatively high level of the index in April (and to a lesser extent in May), the average level for Q2 is significantly higher than that recorded in Q1.

The Employment Index also declined after remaining more-or-less unchanged for the preceding three months (it hovered just above 49 points for March, April and May) – shedding 3.2 points to reach 46, which is roughly in line with the average level recorded in 2017.

The Inventories Index edged lower in June after a 3-point improvement in the previous month. This index has now been stuck below the neutral 50-point mark for just over a year.

The Purchasing Commitments Index stabilised in June and remained unchanged at 45 points. This came after its 3-point decline recorded in May.

The Purchasing Price Index surged higher in June and reached its highest level thus far in 2018. The rise was likely, to a large extent, driven by the (on average) weaker Rand exchange rate compared with May and the hefty fuel price increases over recent months.

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