The Absa Purchasing Managers’ Index (PMI) has fallen sharply again due to load shedding after a rebound in August, falling from 52.1 to 48.2 after averaging 49.3 points in the third quarter. Load shedding was more intense during September compared to August, with the business activity plummeting to 38.5 points from 50.6 in August.
Some respondents said disruption in electricity supply caused the decline in production. At 43, the average for the business activity index in the third quarter is well below the neutral 50-point mark and even below the second quarter Q2 average of 45.
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The Bureau for Economic Research (BER) at Stellenbosch University which conducted the survey, says this underscores the serious constraint that load shedding at elevated stages has on activity growth.
“Even if it does not have a direct impact on curtailing output, some respondents flagged that load shedding weighs on demand for their products due to lower activity elsewhere,” Celeste Booysen from the BER says.
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Load shedding may be causing recession
Economic research group Oxford Economics Africa says in its reaction to the PMI figures that looming recessions in several major economies are causing sentiment to sour across the board. “The disruptions caused by load shedding is idiosyncratic risk, which likely caused the domestic economy to enter a recession during the third quarter while the near-term outlook remains uncertain in the wake of extreme market volatility geopolitics,” the group warns.
The BER says the recent movements of the new sales orders index have, to some extent, therefore mirrored that of the business activity index, while the weakening external environment is likely also to blame for the deterioration in demand. It is then also not surprising that the export index declined for a fourth month. It was stuck in negative terrain for the entire third quarter.
The new sales orders index fell sharply from 48.6 in August to 40 in September and Booysen says in addition to subdued domestic demand, the weakening external environment reflected in the fourth consecutive decline in the export index, likely also contributed to the decline in orders.
Respondents were also less optimistic about business conditions going forward, with the index tracking expected business conditions in six months sliding back to 51.2 from 57.9 in August and an average of 61.5 in the first six months of the year.
Booysen says concerns about the persistence of load shedding, the health of the global economy and perhaps the lingering impacts of higher borrowing costs probably caused them to be less optimistic.
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PMI not boding well for strong recovery
“Overall, the PMI results do not bode well for a strong recovery in actual manufacturing production from a bleak second quarter. However, a normalisation in conditions from the (temporary) shocks weighing on output in the second quarter, particularly in the automotive production value chain, should aid production.”
She says this means that the sector is unlikely to perform as poorly as in the second quarter, but a strong rebound also seems unlikely. Booysen points out that manufacturing production should show modest year-on-year growth in the third quarter after relatively strict lockdown restrictions and the looting and civil unrest in July 2021 affected output negatively.
The purchasing price index continued to signal that cost pressures are cooling and moved lower for a third straight month to reach the lowest level since July last year, while Statistics South Africa’s official producer price inflation figure for final manufactured goods also ticked down in August, with the PMI price index pointing to a further deceleration in September.
Booysen says this suggests that pipeline price pressure has probably peaked, although it remains at elevated levels. The biggest risk facing this encouraging trend now is the recent weakness of the rand exchange rate.
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Changes in load shedding intensity
“The business activity index has seesawed with the changes in the intensity of load shedding and with more disruptions in September than August, the index once again fell sharply. The index is based on a question of how activity changed relative to the previous month and in summary, the third quarter average does not bode well for a strong output recovery in production from a poor second quarter.”
However, she says it is unlikely that output will again decline to such an extent because a normalisation from the second quarter shocks should support output growth.
The employment index stayed in its narrow band of just below 50 points in September and Booysen says the third quarter average is below the first two quarters of the year, which does not bode well for job growth. A respondent remarked that further expansion or employment growth is unlikely until there is more stability in the business environment.
After recent volatility, the inventories index remained largely unchanged from August, while the supplier deliveries index moved up further. With demand weakening from August, renewed supply chain friction seems to be the cause of the deterioration in supplier delivery times.
There was at least a bit of good news in the PMI, with the purchasing price index declining for a third consecutive month thanks to lower fuel prices at the beginning of the month, with more relief expected this week amid lower Brent crude oil prices.