The rise in South Africa’s manufacturing PMI in January appears to hide underlying weakness in activity on the back of virus-related restrictions. Even with some signs of a break in the clouds over South Africa’s economy, we expect the recovery to remain sluggish.
Economy not out of the woods
- The rise in South Africa’s manufacturing PMI in January appears to hide underlying weakness in activity on the back of virus-related restrictions. Even with some signs of a break in the clouds over South Africa’s economy, we expect the recovery to remain sluggish.
- Figures released this morning showed that South Africa’s manufacturing PMI picked up from 50.3 in December to 50.9 in January. The headline reading came in above the Bloomberg consensus of 50.0, and even above the most optimistic estimate.
- The increase in the headline rate masks underlying weakness in the economy. While the new orders and employment components rose, to 47.2 and 48.6 respectively, both remained below the 50-mark which, in theory at least, separates expansion from contraction. (See Table 1.)
- What’s more, the business activity component – which, historically, has a better relationship with the hard activity data than the headline PMI figure – dropped further. The fall in the business activity component, from 44.9 in December to 43.5 in January, is consistent with manufacturing output contracting by 1-2% 3m/3m in January. (See Chart 1.) Restrictions imposed in late-December to curb a second wave of COVID-19 probably weighed on activity in the manufacturing sector.
- There are early signs of a break in the clouds over South Africa’s economy. New coronavirus cases have dropped significantly, with some suggestions that the government is mulling easing restrictions. Meanwhile, vaccines are set to start arriving in the country and there are reports that the authorities are on the cusp of securing 20mn additional doses. Businesses have turned more optimistic about expected conditions in six months’ time –the future conditions component rose from 52.9 in December to 59.2 in January.
- That said, the recovery will be far from plain sailing from here. Only very limited number of vaccines will be delivered in Q1, meaning that a drastic loosening of containment measures is unlikely. Activity will also continue to be disrupted by persistent power cuts. Further ahead, the government’s harsh fiscal austerity plans and weak credit growth will hold back demand.
Chart 1: South Africa PMI & Manufacturing Production
Sources: ABSA/BER, Stats SA, Capital Economics
Table 1: South Africa Manufacturing PMI
Sources: ABSA/BER, Capital Economics
Virág Fórizs, Africa Economist, firstname.lastname@example.org