Improving activity at the Port of Durban and stronger domestic demand are helping to offset weakness in South Africa's manufacturing sector, despite the Absa Purchasing Managers' Index (PMI) declining for a second consecutive month in July.
The seasonally adjusted PMI fell from 47.3 points in June to 46.8 points in July, remaining below the neutral 50-point level. However, the Bureau for Economic Research (BER) said the headline decline overstated the weakness in underlying manufacturing conditions.
Domestic demand strengthened during the month, lifting new sales orders and supporting a second consecutive improvement in production. The business activity index increased to 48.8, suggesting manufacturing output entered the third quarter on a firmer footing than implied by the headline PMI.
The BER also pointed to improving logistics conditions. While the supplier deliveries index declined, it said this should be viewed positively because the index is inverted, meaning faster deliveries lower the reading.
"Recent data suggests activity in the Durban port is picking up – although Cape Town harbour is still underperforming," the BER said.
The recovery, however, remains uneven. Although the new sales orders index recovered most of June's decline to 44.1, the improvement was driven entirely by stronger domestic demand as export sales weakened sharply during July. Respondents reported mixed trading conditions, with some experiencing stronger demand while others described conditions as the worst in a year.
The employment index edged up to 42.2, but the BER said manufacturers remained reluctant to expand payrolls despite the modest recovery in activity.
Meanwhile, purchasing price pressures eased further in July, suggesting the worst of the recent oil price shock had likely passed. However, the BER warned that higher diesel prices and a weaker rand could renew pressure on input costs in the months ahead.
Overall, the BER said the July survey presented a more encouraging picture than the headline PMI suggested, with recovering domestic demand, improving production and easing cost pressures. However, subdued confidence, weak export demand and continued inventory drawdowns indicated manufacturers remained cautious about the sustainability of the recovery.
