PMI suggests improving but tough environment

After declining to 49.3 in March, the seasonally adjusted Kagiso Purchasing Managers’ Index (PMI) increased by 1.2 points to 50.5 in April. This improvement is largely attributable to the index’s two largest-weighted subcomponents, the business activity and new sales orders indices. “The PMI results for April show marginal improvements amid challenging conditions and the outlook for the sector is relatively more positive,” says Abdul Davids, Head of Research at Kagiso Asset Management.

The business activity index regained all of the ground it lost in March and increased by 4.5 points to 52.2 in April. “While this is a positive sign, the level of the index suggests that manufacturing production remains under pressure,” says Davids. The new sales orders index increased marginally by 1.7 points to 53.7, indicating a slight improvement in the demand for manufactured goods.

According to Davids, the 8.6 point decline in the inventory index is due to manufacturers cautiously destocking in the face of uncertain economic conditions, particularly in Europe and China. “Our key trading partners continue to grapple with tough conditions. Preliminary PMI results for April show that the Eurozone reached a four-month low of 46.5 while China dropped to a two-month low of 50.5,” says Davids.

Locally, the employment index continued its downward trend and at 42.1, is at its lowest level since July 2011. This suggests that
manufacturers remain reluctant to increase production capacity until there is a notable and sustained improvement in demand.

On a more positive note, after eight consecutive monthly increases, the price index declined by 9.3 points to 78. Davids believes that this is due to lower oil prices in April. “Although the price index declined notably in April, the relatively high level still indicates that manufacturers face significant input cost pressures, predominantly from higher fuel, electricity and labour costs,” cautions Davids.

Following a decline in March, the index measuring expected business conditions in six months’ time increased by 4.3 points to 51.3. The improved sentiment was supported by the PMI leading indicator (which expresses new sales orders as a ratio of inventories) moving above 1.1. A level above 1 suggests that inventory levels are low relative to demand and usually bodes well for future manufacturing production. “However, the operating environment remains challenging as manufacturers face muted demand and relatively high input prices,” concludes Davids.

Download Report Here

Leave a Comment