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Bleak January PMI print signals tough conditions in SA manufacturing

The outlook for the SA manufacturing sector remains poor. The Barclays/BER Purchasing Managers’ Index (PMI) printed below the all-important 50 mark for the sixth consecutive month, indicating that production in SA’s manufacturing sector continues to face challenging conditions. Even in the absence of electricity load-shedding, the headline figure struggled to move into expansionary territory and instead dipped 2 points to 43.5 in January from 45.5 points in December 2015.

The business activity sub-index fell by a further 4.9 index points to 37.2 points in January, reflecting the worst level in current conditions since 3Q09. The BER attributes this poor reading to persistently weak demand levels and a further rise in input cost pressures. Mounting consumer headwinds including rising interest rates, falling real wage growth and dismal employment prospects highlight further weakness in domestic demand. Despite a sharp 24% depreciation in the rand (on a trade-weighted basis) over the past twelve months, weak global trade activity and rising input costs pose challenges to a faster recovery in external demand.

The PMI price index, which jumped 9 index points to a reading of 86 index points in January on the back of rising imported raw material costs and intermediate products, points to a further likely acceleration in producer price inflation.

In addition, the weaker currency has also partly negated the recent steep decline in Brent crude oil prices which has further fuelled the rise in the PMI price sub-component despite both Opec (Organization of the Petroleum Exporting Countries) and non-Opec producers increasing supply and keeping a lid on international oil prices.

Outlook gloomy for employment in the manufacturing sector

The employment indicator dipped to 45.4 index points in January from 46.5 in December 2015, remaining below the 50-mark since 1Q14. It is likely that elevated nominal wage settlements and labour market tensions have continued to deter an increase in hiring, while fragile demand (both locally and globally) has played a further role in dampening capital investment spend and jobs growth in the sector.

SA manufacturing industry underperforming global trends

Globally, manufacturing sentiment remains intact. The manufacturing PMI for the Eurozone remained above 50, but dropped to 52.3 points in January coming in line with an earlier flash estimate. The main culprits behind the softer-than-expected reading included a slowdown in order books, exports and output levels. A further fall in the PMI price sub-index (following on from further discounting by companies) bodes ill for ultra-low inflation prints, suggesting that further easing by the European Central Bank may be on the cards. 

The PMI reading in the UK inched higher from 52.1 points in December to 52.9 points in January, exceeding market expectations for a rise to 51.6 points. Here, a firmer domestic market more than offset a further disappointment in new export orders as a result of the strength in the pound.       

Meanwhile, the manufacturing PMI in China missed the consensus estimate of 4.6 points. The headline print came in at 49.4 points, reaching the lowest reading in Chinese manufacturing activity since 2012. Nonetheless, the two-speed economy remains on track in China with the services sector PMI posting in positive territory for the same time period. 

Primary and secondary sectors remain a drag on SA GDP growth

The earlier effects of severe drought conditions, low commodity prices and anaemic global trade activity are likely to limit the growth contribution from the agricultural, mining and manufacturing sectors of the SA economy. New sales orders registering at the lowest level since 3Q09 and weak expected business conditions suggest on-going headwinds in the manufacturing sector in particular. We expect mild growth in the (less cyclical) services/tertiary sector of the economy to keep real GDP growth at just below 1% this year, increasing to around 1.5% in 2016.  

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