1 October 2020

Following a robust increase in August, the Absa Purchasing Managers’ Index (PMI) ticked up further to 58.3 index points in September. The shift to a lower lockdown level mid-month likely drove the further improvement in business conditions in the local manufacturing sector. However, as cautioned in August, the fact that the level of the PMI is now above pre-pandemic levels does not directly translate to official manufacturing activity being back to pre-pandemic levels. Due to the month-on-month comparison asked for in the PMI questionnaire, the high level merely means that conditions continue to improve (with more respondents reporting an increase in output for example instead of no change or a decline compared to the previous month). This can still be entirely consistent with the level of output remaining well below that recorded prior to the lockdown. Indeed, some respondents noted that conditions remain far from normal, although improving. Encouragingly, purchasing managers remain optimistic about business conditions going forward. The index tracking expected business conditions in six months’ time ticked up to 64.5 from 63.4 in August and a low of just 27.3 index points in April.

In order to gauge the implications of the PMI results for official production data, it is important to note the quarterly trend in the business activity index specifically. Although the headline PMI also improved on a quarter-on-quarter basis, the increase in the business activity component is more pronounced and probably better reflects the pure output dynamics at this stage. The index averaged just 37.6 index points in the second quarter as activity came to a near standstill in April and was still constrained in May and June. In the third quarter, however, the index averaged 64.6 points, which means that actual output is set to experience a solid quarter-on-quarter bounce. The sharp 7.6% month-on-month increase for actual manufacturing production in July supports this narrative.

Another positive development was that the new sales orders index stayed at an elevated level in September. Some respondents mentioned that customer restocking boosted orders, although export sales softened somewhat. Furthermore, the purchasing inventories index rose back above the neutral 50-point mark for the first time since mid-2019. The employment index remains the main drag on the PMI, but a further increase in the index does suggest that the pace of job losses has slowed.