November factory data signal recovery ‘is hitting the brakes’

Business conditions in the manufacturing sector dropped off in November, with sentiment falling to a four-month low, suggesting that the recovery is losing steam after an initial surge in the wake of measures easing the Covid-19 lockdown.

The Absa purchasing managers index (PMI) — released with Stellenbosch University’s Bureau for Economic Research — fell to 52.6 in November, down from 60.9 in October, the bank said on Tuesday.

While above the 50 level that separates contraction and expansion, it was a sharp drop from October and much lower than the 60 predicted by economists in a Bloomberg survey.

The PMI is a monthly gauge of manufacturing activity and an early indicator of underlying activity. The report indicates that SA’s economy, which the central bank expects to contract by 8% in 2020, is likely to remain under pressure.

The outlook globally has been clouded by a resurgence of Covid-19 infections and lockdowns that limit activity, despite optimism that an effective vaccine may be around the corner.

Demand is also expected to be constrained as the SA government aims at deep spending cuts to stabilise debt that is racing towards 100% of GDP.

The sharp fall in the country’s manufacturing PMI in November points to the recovery “hitting the brakes” in the middle of the fourth quarter, Capital Economics Africa economist Virág Fórizs said in a note.

“While recent developments regarding vaccines have brightened the outlook, harsh austerity will act as a key headwind to the economy over the coming quarters,” Fórizs said.

The Absa index is based on surveyed responses to a number of questions, including new sales orders, employment and purchasing prices.

Manufacturing was one of the hardest-hit sectors in the Covid-19 national lockdown that closed down virtually the whole economy from late March.

In the second quarter it contracted almost 75% on a seasonally adjusted and annualised basis, and was the largest contributor to the overall GDP decline reported by Stats SA.

Coming from such a low base, the manufacturing sector experienced a surge in activity as SA moved to looser levels of the lockdown.

The stalling in November indicates that, having returned to levels before the shutdown, growth in demand has not been strong enough to sustain its recovery.

“The drop suggests that the manufacturing sector’s recovery is starting to lose momentum,” Absa said, adding that this is expected as output levels for many subsectors are nearing pre-pandemic levels.

The subindex measuring new sales orders dipped below the 50-point neutral mark, partly driven by a renewed decline in export sales.

Absa said this could be linked to lower activity in Europe, a key export market that has been hit by a resurgence of Covid-19 cases and renewed lockdowns.

The index tracking business conditions in the next six months fell to 52.7 points in November, from 56.2 points in October, amid renewed concerns about coronavirus developments in SA.

Employment in the sector continues to battle.

Though it has come back from historic lows in April and May, the subcomponent gauging employment has been unable to breach the 50 points level on the index. In November, it fell to 47.2 points.

THE ABSA PURCHASING MANAGERS INDEX FELL TO 52.6 IN NOVEMBER, DOWN FROM 60.9 IN OCTOBER