The Absa Purchasing Managers’ Index (PMI) fell below 50 points to 43.8 points in May, from 54 points in April, despite the fact that there was no loadshedding that month.
Absa states that the deterioration, instead, seems to have been driven by a significant drop in demand ahead of the national elections.
Several respondents said orders were put on hold as clients awaited the elections and the outcome thereof. The PMI has been in contractionary territory for three out of five months this year, as the manufacturing sector appears to be volatile in an election year.
The business activity index declined sharply to 38.1 points in May from 57.2 points in April.
However, the average for the first two months of the second quarter is better than the first-quarter average. This points to some improvement from the expected contraction in manufacturing output in the first quarter.
Port delays and global supplier problems in the transport sector contributed to a decline in production. However, the biggest driver was probably a drop in demand, Absa says.
New sales orders declined to 37.8 points in May from 55.6 points in April. Amid sustained high interest rates and low credit extension, domestic demand remains sluggish. Respondents said that orders are drying up as consumers seem to be focusing on necessities.
The employment index declined significantly by 5.9 points to 43.5 from 49.4 in April. Manufacturers seem to be adjusting staff as production and sales are down.
Further, the inventories index declined by 6.2 points to 44.5 in May following a brief stint at about the neutral 50-point mark at 50.7 in April.
Export sales also fell back in May, putting further pressure on demand. Further, supplier problems in Europe affected some of the local manufacturers in the transport sector, as there were delays in the deliveries of the necessary parts used as input in the local market.
Port issues remain a concern for most local manufacturers, although there was an improvement in supplier deliveries, suggesting that the situation is improving, Absa notes.
Supplier performance improved in May, declining to 55.4 in May from 57.4 in April, indicating shorter delivery times.
Negatively, low demand may have supported this improvement, as there are fewer orders that the suppliers need to meet.
"Though port issues remain, the improvement in deliveries is welcome and can hopefully be sustained if orders start to tick up post-election," Absa says.
The PMI results contained some good news, as the index for expected business conditions in six months’ time increased to 57.6 in May from 55.7 in April. Respondents likely hope for a favourable election outcome and a return of orders that have been put on hold.
Manufacturers could also be more upbeat about the global economic recovery, particularly in Europe.
Additionally, further positive news was that the purchasing price index declined to 66.9 in May from 72.4 points in April. This is the lowest reading in six months and a second consecutive month of decline in input prices, reflecting easing cost pressure.
Oil prices have remained relatively low owing to sluggish demand in the global markets, which supports the manufacturing industry. The stronger rand exchange rate through most of the month likely also contributed to softer cost increases.