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Manufacturing index takes surprise leap to positive territory
Manufacturing index takes surprise leap to positive territory

Manufacturing index takes surprise leap to positive territory

ECONOMIC NEWS - Feb 2nd 2017, 12:20

The Absa purchasing managers’ index (PMI) staged a surprise recovery and rose to 50.9 in January, suggesting that manufacturers got off to a better start in 2017 than predicted. 

The index reading for December was 46.7.

The index had been below the 50 neutral level since July 2016 and economists had forecast little improvement. A reading below 50 suggests contraction, while one above that mark indicates there is appetite for expansion.

BNP Paribas economist Jeffrey Schultz said: "A move back into expansionary territory for four of the five subcomponents of the PMI is encouraging and points to a better start to the year for domestic manufacturers."

Bureau for Economic Research economist Lisette IJssel de Schepper said improved sentiment about business conditions among factory managers surveyed for the index was a surprise.

"Manufacturers targeting the export market may expect to benefit from an uptick in global demand, as reflected by the sustained high levels of PMI readings in the US, Europe and, to a lesser extent, China," she said.

China’s PMI was 51.3 in January from 51.4 in December. Despite the slight drop, it remained above the 50 level, leading to positive sentiment about the manufacturing sector.

In SA, an increase in orders led to higher manufacturing output and this contributed to the business activity subindex rising to 52.7, its best level since June.

However, the employment subindex shows that prospects are not expected to improve immediately even though it rose two points to 48.2 in January.

IJssel de Schepper said the improvement in the employment subindex signalled "somewhat of a stabilisation".

But, she added, "with the labour data that’s so confusing at the moment it is very difficult to make a [definitive] call".

MMI Investments and Savings economist Sanisha Packirisamy said growth in real fixed investment in the manufacturing sector in 2016 averaged -4% compared with 2015. "In our view manufacturers are likely to wait for a sustained improvement in demand conditions before expanding their labour force and investing in additional capacity."

The sector struggled in 2016 from weak global demand, lower commodity prices, and exchange rate movements.

Packirisamy pointed out the Quarterly Labour Force Survey showed that 28,000 jobs were lost between the second and third quarters in 2016. But 91,000 jobs were shed between the third quarter of 2015 and the same period in 2016.

There is mixed sentiment over the improvement in business activity over the coming months. The inventories index was slightly higher than new sales orders, meaning that manufacturers were saddled with extra stock. "This means that the business activity index may fall back somewhat," economists at the bureau said.

Africa economist at Capital Economics in London John Ashbourne said key metrics such as manufacturing output, exports of manufactured goods and business confidence remained weak in December.

"Given the sharp improvement in the measure of expected conditions [in January], the change in the headline PMI may have more to do with sentiment than any tangible change on the ground," he said.
© BusinessLIVE MMXVII 

Read more about: sa economy | pmi | manufacturing

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