The drop in South Africa’s manufacturing PMI provided the first strong signal that the sector’s rebound has stalled in recent weeks. With the authorities struggling to bring the virus under control and restrictions being tightened, the recovery will remain slow and bumpy and is likely to prompt further monetary loosening.
Manufacturing recovery stutters
- The drop in South Africa’s manufacturing PMI provided the first strong signal that the sector’s rebound has stalled in recent weeks. With the authorities struggling to bring the virus under control and restrictions being tightened, the recovery will remain slow and bumpy and is likely to prompt further monetary loosening.
- Figures released this morning showed that South Africa’s manufacturing PMI fell from 53.9 in June to 51.2 in July, easing for the first time following two months of improving conditions from its trough in April. (See Chart 1.) The latest reading was below the Bloomberg consensus forecast of 52.8.
- The breakdown suggests that the recovery in business activity and new orders stalled in July. The components dropped back to 62.9 and 53.4 respectively last month. (See Table 1.) While both are still above the 50-mark, that in theory separates expansion from contraction, the fall shows that South Africa’s lockdown and the recent rise in coronavirus cases weighed more heavily on activity last month.
- The slight tick-up in future business conditions, from 51.2 to 51.8, is barely any comfort. And despite the rise in the employment component of the headline index, it continues to remain at a very low level suggesting that the coronavirus crisis is leaving lasting damage on the labour market.
- Looking ahead, we think that the manufacturing sector will struggle to fully recover. Some manufacturing businesses are not yet permitted to fully operate under the current lockdown level and will only able to return to 100% of employment under lockdown level two, for which officials have not provided a timeline. With the authorities struggling to get on top of the virus, a further easing of restrictions is some time away.
- All in all, this reinforces our view that South Africa will experience a slow and bumpy economic recovery, and that the Reserve Bank will probably deliver more stimulus. We expect the repo rate to be lowered by a further 50bp, to 3.00% by year-end while markets are pricing in less easing (to 3.25%).
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, email@example.com