The Kagiso Purchasing Managers’ Index (PMI), released on Monday, recorded a continued decline in May as the business activity index plunged and the employment index reached a five-year low.

The seasonally adjusted PMI fell 3.1 index points to a four-year low of 44.3 index points in May, signalling depressed factory-sector output, Kagiso Asset Management head of research Abdul Davids said.

The PMI’s deterioration was attributed to a six-point drop in the business activity index from 48.5 index points in April to 42.5 in May, as factory output headed into “contractionary territory”.

This followed a 2.9 index point decline to 47.4 in the seasonally adjusted PMI for April – its lowest level since July 2011.

“[The] worse-than-expected manufacturing PMI figures only serve to underline the grave concerns we have with regards to the near-to-medium term outlook for local industrial production,” BNP Paribas Cadiz Securities economist Jeffrey Schultz commented.

This came as Statistics South Africa (Stats SA) reported the country’s first quarterly gross domestic product (GDP) contraction since 2009.

South Africa’s economy shrank 0.6% quarter-on-quarter in the first three months of this year as mining production slumped 24.7% on the back of a five-month strike in the platinum sector.

The prolonged platinum sector strike continued to “cast a shadow” over the embattled mining sector and the related sectors within manufacturing, resulting in weak domestic demand.
“Each day the strike continues, tens of millions of rands in purchases do not occur,” Manufacturing Circle executive director Coenraad Bezuidenhout said, adding that muted domestic demand for manufactured goods meant smaller volumes and higher production costs.

“70% of platinum-group metals are also used for industrial applications, which means the strike also imposes supply-side constraints on manufacturing,” he added.

Schultz believed that, even if a resolution to the strike was found in the coming weeks, the index would likely remain depressed in the months ahead.

Investec economist Kamilla Kaplan, in a note to clients, pointed out that, with the manufacturing sector contributing 15% to GDP, the performance of the sector would have a “meaningful impact” on future growth.

The manufacturing sector performed poorly in the first quarter, with a 4.4% contraction shaving 0.7 percentage points off overall GDP growth, according to Stats SA.

“The PMI readings so far, suggest that the manufacturing sector will weigh on the second quarter of 2014’s GDP outcome, which is likely to be weak,” she said.

New Finance Minister Nhlanhla Nene this week moved to ease fears that South Africa was heading into a recession, saying that the economy had hit the “bottom of the curve” but was not recessionary.

Kagiso’s report showed that, in line with the slowdown in activity, the employment index fell sharply to 37.2 index points – the lowest level in five years – which implied renewed job losses in the manufacturing sector.

“The sharp decline in the employment subindex from 44.6 to 37.2 is particularly worrying, as it means job losses may accelerate rapidly in the manufacturing sector,” Bezuidenhout commented.

The protracted strike had also impacted the new sales orders index, which, despite a slight uptick to 44.8 index points in May, remained at the lowest level since August 2009, barring April’s recorded 43.5 index points.

“Not only is the manufacturing sector directly affected [by the ongoing platinum sector strike], but the loss of platinum miners’ wages also impacts the consumer sector, which filters back to demand for manufactured products,” said Kagiso.

However, the price index fell for the third consecutive month to 70.8 – 25 points below the record high level reached in February 2014 – suggesting “a moderation in price increases,” Davids said.

This slowdown suggested some input cost respite was being felt within local manufacturing, owing, in part, to a slightly more resilient rand in May.

“With the rand still extremely vulnerable to changes in global risk appetite, as well as idiosyncratic factors such as strikes and high current account and trade deficits, we remain cautious on getting too excited that input cost pressures are fast abating in this side of the economy,” Schultz said.

But, Kagiso pointed to improving conditions in developed economies, continued weakness in the rand and signs that Chinese factory activity was “picking up”, possibly boding well for South African manufacturers targeting the export market.

Further, the index measuring expected business conditions in six months’ time rose to 59.6 index points and the PMI leading indicator also improved slightly but remained below level 1 – implying that inventory levels were high compared to the volume of sales orders, Davids concluded.