South Africa's manufacturing activity slips into contraction, sparking economic concerns

The latest data from the Absa Purchasing Managers’ Index (PMI) has stirred alarms among economic analysts, revealing a disconcerting retreat into contractionary territory in the manufacturing sector.

Released on Monday, the August PMI indicates a decline of 1.4 points to 49.5, marking a significant regression after a brief moment of optimism in July when the index had edged into expansionary territory for the first time in nine months.

The PMI, which is compiled by the Bureau for Economic Research (BER) on behalf of Absa, serves as a critical barometer of manufacturing activity in South Africa.

This latest figure highlights a subdued atmosphere in the sector, with both domestic and export demand facing persistent sluggishness.

Absa noted that despite July's 2.3-point improvement, economic activity remains lacklustre as new sales orders plummeted by 8.5 points to 47.4 in August. This marks a stark contrast from October 2024, when new orders last experienced growth.

Respondents in the survey pointed to ongoing external pressures, particularly tariffs that are adversely affecting exports, alongside domestic challenges. The low growth environment continues to stifle economic vitality, with indications of heightened competition from cheaper imports further exacerbating the situation.

The business activity index, another significant component of the PMI, fell 1.3 points to 45.8, maintaining a contractionary stance that has persisted for ten months.

Meanwhile, the supplier deliveries index dipped by 3.5 points to 53, which suggests declining orders rather than improvements in logistics – a concerning red flag for manufacturers relying on consistent demand.

Interestingly, the employment index witnessed a slight increase of 5.2 points, reaching 48.9 in August.

Despite this uptick, employment remained below the crucial 50-mark, underscoring a year-and-a-half-long struggle to regain footing amid a challenging trading environment. The data indicates that only a sustained recovery in business activity could result in meaningful growth in employment opportunities.

On a somewhat positive note, the purchasing price index experienced a slight easing, falling by 0.8 points to 58.5, signalling modest relief concerning input costs. The rand's performance also offered a glimmer of hope, remaining relatively strong throughout August. It consistently traded below R18/$, even achieving a mid-month high of R17.40/$, a welcome development for importers.

The future outlook, however, displays mixed signals. Despite the concerning present figures, an index tracking anticipated business conditions six months from now improved marginally from 56.4 in July to 56.8 in August.

“Given the increasingly difficult trading environment, it is encouraging to witness some stability in this index,” Absa said.

Lara Hodes, Investec Economist, said the PMI's outcome was largely in line with their forecast.

“Specifically, domestic conditions remain subdued in a low growth environment, while globally the uncertainty around the effect of tariffs has weighed on demand,” she said.

“Respondents refer to tariffs hurting exports, even if they themselves are not directly impacted; some mention knock-on implications of impacted clients.”

Hodes added that the supplier delivery index fell by over 3.0 points to 53.0 (the index is inverted, so a decline suggests faster deliveries), likely be attributed to a fall in orders on waning demand, as opposed to any efficiency gains.

Hodes said that the employment index increased in August but remained in contractionary territory (below 50).

“It has been in negative terrain for over a year. A lift in confidence, driving investment and accordingly growth, is imperative to lift employment numbers.”

Professor Raymond Parsons, a North-West University Business School economist, said high frequency data continues to show a mixed picture of economic performance.

“Although the Absa PMI is back in negative territory, other economic data suggest that GDP growth is still on a positive, if modest, trajectory this year. On present broad evidence, the economy is still on track for an overall growth rate of about 1% in 2025 as a whole,” he said.

Parsons added that downside risks to the growth outlook will come from a very uncertain global environment, especially the potential negative impact of higher US tariffs on key sectors of the South African economy.

BUSINESS REPORT