South Africa PMI Higher, First Time in a Year

On June 3, Standard Bank released its monthly Purchasing Managers’ Index (PMI) for South Africa, which shows that the beleaguered sub-Saharan nation has risen above the crucial 50-point mark for the first time in 12 months, with the data coming in at 50.2 for May 2016.

The figures point to some marginal improvements in operating conditions and to an increase in overall new business — both due in part to stronger demand from export markets and to an acceleration of input cost inflation. In addition, operating conditions at South African private sector businesses improved in May for the first time in a year, driven mainly by a return to new order growth and renewed job creation. “However, output continued to decline and companies remained cautious about their stock policies,” Standard Bank noted in its report. “Inflationary pressures accelerated, with both input and output prices rising at stronger rates.”

south-africa-manufacturing-pmi

Standard Bank South Africa PMI

PMI = Purchasers’ Managing Index.

Note: The vertical axis indicates the PMI points. A PMI of 50.0 indicates no change over the previous month’s rate of growth.

Source: Standard Bank, Markit, 2016.

The PMI is a composite index that’s calculated as a weighted average of five individual components: new orders (30 percent), output (25 percent), employment (20 percent), suppliers’ delivery times (15 percent) and stocks of purchases (10 percent). Readings above 50 points typically signal an improvement in business conditions over the previous month, while readings below 50 points indicate a deterioration.

Kuvasha Naidoo, an economist at Standard Bank, noted that May’s improvement in the PMI data was a welcome turning point for South Africa. “However, more above-50 point prints will be necessary to make a trend that instills investment confidence,” he said. “The rise in the PMI was driven by new orders on the back of rising external demand as well as new clients and investments, which also had a positive impact on employment during the month.”

Challenging economic conditions caused the actual output to remain in contraction. Output was also negatively impacted by rising input costs, despite expanding new orders. Both input and output costs rose in May.

The first increase in new order intakes in six months was the main contributor to the improved PMI figure, with companies commenting on their acquisitions of new clients and increased investments. The report’s findings also highlighted the fact that stronger demand from export markets supported overall new business wins.

“Interestingly, the three-month moving average of the leading PMI indicator is above 1.0, which implies that new orders are exceeding stocks of purchases,” said Naidoo. But he added, “We would have to see a corresponding rise in inventories to above 50 for the ratio to meaningfully signal future expansion in the private sector.”

Seasonally adjusted, Standard Bank’s official South Africa PMI figures show a rise from April’s 47.9 to May’s 50.2. Although signaling overall growth, the increase in the underlying pace of expansion was only fractional.

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