Manufacturing sector sees unexpected resurgence in July after eight months of decline

Manufacturing activity in South Africa in July returned to positive territory for the first time in nine months, in a significant turnaround for the struggling economy.

The Absa Purchasing Managers’ Index (PMI) released on Friday indicated that the index edged above the 50-point mark and recorded an expansion, following eight consecutive months in contractionary territory.

The last time the headline PMI was in the above-50 expansionary territory was in October 2023 at 52.6 points.

According to Absa, new sales orders rose by 9.7 points to 55.9 in July, recording a third consecutive month of improvement and signalling a much stronger recovery in demand at the start of the third quarter.

“Export sales also showed a significant increase, but at a low level, signalling that manufacturers remain cautious amid regulations and ongoing trade negotiations,” Absa said.

“The improvement in demand fostered an uptick in production, seeing the business activity index tick up 5.2 points to 47.1 points in July – still coming in below the neutral-50 mark for the ninth consecutive month.”

Absa added that the supplier deliveries index increased by 1.4 points to 56.4 in July on the back of the strong uptick in new orders, which typically leads to longer delivery times and some delays.

“Despite the strong recovery in demand which filtered through into an uptick in production, the employment index declined by 6 points in July, reaching 43.7 - reversing the gains made in June and returning to levels seen earlier in the year,” it said.

“The weak employment level may be due to the slow recovery in activity, which, despite ticking up, remains in contractionary territory, signalling that manufacturers may wait to see a stronger recovery in demand before increasing employment.”

The purchasing price index also increased by 1.2 points in July, signalling growing cost pressures as the cost of some input materials increased.

Absa noted that crude oil prices increased fuel prices in the country, with petrol and diesel prices rising by 52 to 84 cents a litre, depending on the grade.

It said the positive news was that, despite the uptick in the index, the current levels remained the second-lowest in over eight years. Furthermore, despite heightened global uncertainty, Absa said the rand stayed below R18/$ for July.

However, Absa note that expected business conditions in six months’ time declined from 62.5 points in June to 56.4 in July.

“Although still above the 50-neutral level, the direction of the index suggests that manufacturers are faced with an increasingly volatile and challenging trading environment on both the global and domestic front.”

Investec economists have welcomed the findings of the PMI, a survey conducted by the Bureau for Economic Research (BER) and sponsored by Absa.

Investec economist Lara Hodes said the PMI moved into expansionary territory in July after tracking below 50 since October last year.

“Specifically, it rose by 2.3 points to 50.8. The new sales orders index jumped to 55.9 from 46.1 previously, indicating “a much stronger recovery in demand at the start of the third quarter,” according to the BER,” Hodes said.

“Export sales picked up from low levels logged in previous months; however, uncertainty around trade tariffs has weighed notably on manufacturers.” 

Hodes added that the movement in business activity was less favourable.

“Although it increased by over 5 points, the index remained in contractionary terrain at 47.1. Moreover, the supplier delivery index rose by 1.4 points (the index is inverted so a decline suggests faster deliveries), underpinned by the strong uptick in new orders, which typically leads to longer delivery times and some delays.”

Hodes said that the employment index slumped to 43.7, after lifting to 49.7 in June.

“It has been in negative territory for sixteen consecutive months. A lift in confidence, driving investment and accordingly growth is imperative to lift employment numbers. Purchasing prices lifted again in July, after easing somewhat in June. An increase in both the petrol and diesel price in July would have added upward pressure,” she said.

“The index measuring anticipated business conditions (in six months’ time) remained above 50 but eased somewhat from June’s elevated 62.5 points. This implies that manufacturers have had to deal with a highly uncertain and “challenging trading environment on both the global and domestic front,” according to the BER.”

BUSINESS REPORT