October 2, 2003

By Quentin Wray

Johannesburg - The manufacturing sector looks set for a "mild contraction" following yesterday's release of the latest Investec's Purchasing Managers Index (PMI).

The seasonally adjusted PMI - sponsored by banking group Investec but done by independent think-tank the Stellenbosch University-based Bureau for Economic Research (BER) in conjunction with the Institute of Purchasing and Supply SA - fell sharply in September to a new low of 45.7. In August it was 49.3.

Survey readings of over 50 are seen as positive while those less than 50 are net negative.

Unlike other confidence indicators, the PMI is only focused on the manufacturing sector.

André Roux, the head of fixed income at Investec Asset Management, said the latest reading showed a "significant deterioration in manufacturing business conditions". He said the contraction in manufacturing in the first half of the year seemed to have carried over into the third quarter, although it might continue to be relatively mild.

All the components of the PMI contributed to September's fall. Output activity weakened, new sales orders declined and sales order backlogs shrank.

The strong rand meant that local manufacturers were losing out to foreign competition.  

There were signs that employment in the sector had been affected with the seasonally adjusted employment index falling 3 points.

Only 37 percent of respondents to the survey anticipate an improvement in business conditions in six months, compared with 46 percent in August and 54 percent in July.

About 17 percent expect a deterioration, compared with 16 percent in August and 15 percent in July.

Roux said that while it was "possible that respondents may have become too pessimistic, as long as the world economic recovery remains uneven and the rand's strength persists, the recovery in manufacturing will be under pressure".

The PMI data confirm the findings of another BER survey, the business confidence index (BCI), sponsored by Rand Merchant Bank. Although the BCI rebounded in the third quarter and is expected to improve further, the manufacturing sector recorded its lowest confidence level (at 42) since the second quarter of 2000.

Overall, the BCI rose to 55 in the quarter from the second quarter's neutral level of 50, due to stellar performances by the building and new vehicle trade sectors.