Conditions in the South African manufacturing sector deteriorated at the end of the third quarter, with the seasonally adjusted Absa Purchasing Managers' Index (PMI) having decreased by 4.3 points to 45.4 in September.
"The soft reading for the headline PMI was driven by very weak demand and constrained production. In terms of the former, September saw an outsized decline of more than ten index points in the new sales orders index, which fell back to a level last seen in mid-2021," the PMI states.
External and domestic demand for South African manufactured goods seems to have been under pressure, with the export index hit hard in September. This most likely reflects the weakening growth momentum in the Eurozone and the UK, both key export markets for local manufacturers.
On the domestic front, restrictive borrowing costs and perhaps also the sharp fuel price hikes at the start of September weighed on demand.
It was also a poor month for production as the PMI business activity index tanked by 8.1 points to 41.9. This index was extremely volatile in the third quarter.
Compared with August, there was a step-up in loadshedding during September. Along with poor demand conditions, this may help to explain the low level of activity during the month.
For the entire third quarter, the business activity index averaged 43.3, down from an average of 48.1 in the second quarter. The move lower would be consistent with a quarterly contraction in actual manufacturing output.
"If this materialises, it will weigh on overall gross domestic product growth momentum in the third quarter," Absa warns.
Turning to input costs, the PMI purchasing price index increased for the second month in a row.
This is consistent with sustained rand weakness and the sharp move higher in international oil prices during the past month.
As a result, another significant diesel price increase is on the cards for October.
On a more positive note, purchasing managers do not expect the current tough trading conditions to persist. The index measuring expected business conditions in six months rose to 55.6, the highest level since March this year.