May’s rebound in the Purchasing Manager’s Index (PMI) for manufacturing in South Africa reversed April’s losses, but recovery in the sector is on shaky footing because of Eskom’s load-shedding, independent research consultancy Capital Economics has said.
Moreover, price pressure in manufacturing doesn’t look like it’s going to ease up soon.
In addition, it’s unlikely that the Reserve Bank will keep the repo rate in check at its next Monetary Policy Committee (MPC) meeting.
Rather, a 50 basis point (bp) hike is expected.
Figures released this morning showed that the manufacturing PMI by Absa and the Bureau for Economic Research increased from a nine-month low of 50.7 in April to 54.8 in May.
“The outturn beat even the most optimistic forecast collected by Bloomberg,” Capital Economics said.
Losses were also only partially reversed by headline PMI.
Flooding in KwaZulu-Natal and renewed power cuts hit the sector hard.
To put this into perspective, manufacturing PMI tanked by over nine points in April, only four of which were recouped in May, mainly because of the country’s failing grid and recurring blackouts.
According to Capital Economics: “The breakdown of the data showed improvements in the new sales orders and business activity components of the headline PMI.
“The former rose from 43.6 in April to 58.5 in May. But the latter, at 49.3, remained below the 50-mark, which in theory separates expansion from contraction in May.
“On past form at least, the business activity component is consistent with manufacturing output, posting a small contraction of about 1% in May.
“The contribution of the manufacturing sector to headline growth is likely to be much more subdued in the second quarter (Q2) compared to the solid performance over Q1.
“Meanwhile, the prices component of the PMI points to only a slight easing of price pressures.
“It dropped back, from 89.6 in April to 88.1 last month, leaving it at a very high level.”
Unfortunately this will probably not be enough to cool inflation concerns at the Reserve Bank.
“After policymakers stepped up the pace of their tightening cycle this month, MPC members are likely to deliver another 50bp interest rate hike before switching back to 25bp hikes, taking the repo rate from 4.75% now to 5.75% by year-end,” Capital Economics concluded.
