Manufacturing contracts again

• Domestic business conditions and sentiment continue to deteriorate as a result of ongoing load-shedding

Manufacturing activity contracted for a fourth successive month in May as business conditions and sentiment continued to deteriorate amid ongoing power cuts. The Absa purchasing managers’ index (PMI) declined to 49.2 points, down from 49.8 points in April.

Manufacturing activity contracted for a fourth successive month in May as business conditions and sentiment continued to deteriorate amid ongoing power cuts.

The Absa purchasing managers’ index (PMI), compiled by the Bureau for Economic Research at Stellenbosch University, declined to 49.2 points, down from 49.8 points in April, further below the 50-point mark that separates expansion from contraction.

Absa senior economist Miyelani Maluleke said the reading is the most pessimistic respondents have been about the nearterm outlook since the strictest phase of the country’s Covid lockdown three years ago.

Earlier this week Eskom announced that stage 4 loadshedding be implemented during the day and stage 5 in the evenings until further notice. At the time the amount of power lost to plant breakdowns had increased to 18,144MW, while a further 3,427MW was offline for maintenance, leaving the company’s energy availability factor at 54% of installed capacity.

Eskom also cautioned in its operational performance update two weeks ago that unplanned outages of about 18,000MW could result in load-shedding of as much as stage 8 in the winter as peak demand rises.

The economic effect of the power shortage is further captured in the electricity output data for April released by Stats SA on Thursday.

That shows generation has contracted 7.9% on an annual basis, so far this year.

On an annual basis, electricity production decreased by 8.6% in April, worse than March’s 5.6% contraction.

Maluleke said Eskom’s recent warning in its State of the System and Winter Outlook briefing that the grid is severely constrained and there is a high risk of longer power cuts in winter probably contributed to the deterioration in sentiment.

Absa said it had estimated load-shedding of 2,940GWh in April compared with 2,075GWh in March, suggesting further declines in available power in the months ahead.

Manufacturing is SA’s fourthlargest sector, contributing 14% to GDP, and the data provide valuable insight into the health of the economy.

A MATTER OF RESILIENCE

Jee-A van der Linde, Africa economist at Oxford Economics, said manufacturing activity would improve only once manufacturers become progressively resilient to the effects of load-shedding by reducing their dependence on Eskom.

“Demand has been weak and operating conditions are extremely challenging. This situation is unlikely to improve in 2023,” Van der Linde said.

Nedbank senior economist Johannes Khosa said electricity shortages will remain the main drag on the economy. Power cuts are likely to intensify in the second and third quarters given escalating demand during winter.

“It is becoming clear that the electricity crisis will not be resolved quickly. Although there are now three ministers in some way responsible for energy security, Eskom’s operations haven’t improved,” Khosa said.

“This despite enormous fiscal support over the past decade amid persistent allegations of deep-seated corruption at the power utility.”

Khosa said that in addition to the severe power shortages, SA’s crumbling rail network and inefficient operations at its ports would continue to undermine mining and manufacturing production and, therefore, exports.

“Apart from these domestic constraints, exporters will also feel the pinch from slower global demand and falling commodity prices. Therefore, export volumes will likely decline in 2023,” he said.

The Absa survey shows respondents were more negative about future business conditions. Data from the bank shows that the index tracking expected business conditions in six months’ time fell to 43.7 in May, from 51 in April. The new sales orders index was stuck in negative terrain for the fifth straight month, though it improved slightly to 47.5 points in May from April’s 44.3 points.

The index capturing business activity was little changed at 47.7 points compared with 47.6 in April.

Meanwhile, the purchasing price index ticked up once again in May.

Maluleke said that the significantly weaker rand exchange rate was likely to have added to upward pressure on costs and offset the mitigating effect of the drop in fuel prices at the start of May.

The employment index was unchanged for a third month, in line with expectations, given little movement in the demand and activity indicators.

The supplier deliveries index increased further in May, but remained weak relative to readings since the onset of the pandemic.

Maluleke said disruptions on the country’s rail network may have contributed to the uptick, as general signs are that global supply chains are less constrained than the previous year or two.

“Faster deliveries of raw materials and intermediate goods result in a decline in the index — and detract from the headline PMI because preCovid, more rapid deliveries were often caused by weaker demand conditions,” he said.