02 Feb.
Manufacturing outlook turns corner as PMI shows expansion.
The outlook for manufacturing has unexpectedly leapt into positive territory. Data out yesterday showed the seasonally adjusted Kagiso purchasing managers index (PMI) rebounded strongly to 53.2 last month from 49.4 in December. This is the highest level since June last year and above the 2011 average of 52.1.
The index, a critical measure of manufacturing activity, is compiled each month by the Bureau for Economic Research at the University of Stellenbosch, in collaboration with the Institute for Purchasing and Supply SA. It is based on surveys of purchasing managers in the manufacturing sector. A level above 50 implies factory output is expanding.
Abdul Davids, the head of research at Kagiso Asset Management, which sponsors the survey, said: “The January reading is substantially above the consensus expectation of 50.2 and also above most developed countries’ flash readings for January.”
He attributed the “robust PMI increase” to “the seasonally adjusted new sales orders index, which surged by nine index points to a seven-month peak of 57.3 index points”.
Colen Garrow, the economist at Brait, noted manufacturing contributes almost 14 percent to overall gross domestic product (GDP). “The PMI is published one month before the manufacturing data released by Statistics SA and is a useful pointer to the outlook for a crucial sector of the economy.”
Garrow identified challenges to the sector despite “the obvious boost from weakness in the rand exchange rate since last September”. The rand has weakened from about R7 to the dollar early in that month to a worst level of R8.6 in November. At 5pm yesterday it traded at R7.7153 to the dollar.
He spoke of “headwinds” from the crisis in the euro zone.
“With around 35 percent of trade conducted with this constellation of 17 countries, it matters to South Africa how deep the recession in the region turns out to be.
“In addition, the UK is also falling into recession. British fourth-quarter domestic product contracted by 0.2 percent. The UK accounts for some 15 percent of trade with South Africa,” he added.
Kevin Lings, the economist at Stanlib, sounded a warning note about the data. “In recent months, a fairly significant divergence has emerged between the actual manufacturing data and the PMI readings.”
Though the latest PMI reading closed some of the discrepancy, he said the large change in the PMI, over a one-month period, “raises concerns about the survey process”.
He also expressed concern about the volatility of Stats SA’s manufacturing data.
News from abroad was mixed yesterday. Barclays Capital said China’s official manufacturing PMI rose to 50.5 last month from 50.3 in December, topping the median estimate in a Bloomberg survey for a reading below 50. “It defied the usual seasonal decline in the month of the Chinese New Year and posted an upside surprise for a second month in a row.”
Barclays added: “The report reflected the strength of domestic demand and points to our case for a soft landing in Chinese growth.” The outlook for China is critical to the economic health of the rest of the world, because it has been the main driver of global growth.
Barclays said January PMIs also showed improvement in Australia, South Korea and Taiwan – “suggesting stabilisation in manufacturing output”.
However, Bloomberg reported that the New York-based Conference Board’s US confidence index decreased to 61.1, lower than the most pessimistic forecast in a Bloomberg survey of economists, from a revised 64.8 the prior month.
Source: Business Report
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