Manufacturers remain gloomy about the outlook for business

Manufacturers remain gloomy about future business conditions and their fixed investment plans, while firms continue to be pessimistic about future investment plans, a survey has found.

The BER-Absa manufacturing survey showed that manufacturing business confidence remained unchanged at 26 index points in the fourth quarter, a reading well below its long-term average of 39.

The findings suggest that less than three out of 10 respondents were satisfied with prevailing business conditions. About seven out of 10 businesses reported “unsatisfactory” business conditions.

SA’s manufacturing sector contributes 14% to GDP, but this year it had to contend with bouts of intense load-shedding, Transnet’s woes, water-shedding in some parts of SA and continued pressure on production costs, making for a difficult operating environment.

Absa economist Andiswa Mdingi said even though the sector benefited from easing of transport constraints following the devastating flooding in April, the manufacturing sector expanded in the third quarter of 2022 but had not fully recovered from the collapse in the second quarter.

“Manufacturing production was expected to recover from the flood-induced collapse in quarter two, but intense loadshedding during the quarter risked outweighing these gains,” Mdingi said.

GDP data released on Tuesday showed that the manufacturing sector was surprisingly resilient in the third quarter in the face of the rotational power rationing.

Stats SA reported that after cumulative growth of 2.3% in July and August, manufacturing output surged 4.9% month on month in September despite record high load-shedding.

This is in direct contrast to the purchasing managers index’s (PMI’s) business activity index, which printed at 39.8 in September, down from 47.8 in August.

While no official data for quarter four is available yet, the Absa PMI rose firmly back into expansionary terrain in November, increasing to 52.6 points, up from 50 in October and an average level of 49.6 recorded in the third quarter (Q3).

“This suggests that the manufacturing sector could book another slight expansion in the fourth quarter,” Mdingi said.

Global manufacturing also remains constrained. The November preliminary S&P Global manufacturing PMI results for the eurozone, UK, and the US point to a contraction in the sector as production suffered from slowing demand.

In the eurozone new order volumes fell across the board, which lead to backlogs of orders falling at the sharpest pace in two years. In the UK, fewer supply shortages helped slow down the rate of contraction. However, weak demand remains a central theme as consumers battle the rising cost of living.

In the US, the manufacturing PMI fell into contractionary territory for the first time since mid-2020 as new orders were curtailed by slowing consumer demand. In China, the National Bureau of Statistics and the Caixin manufacturing PMI for October both showed that factory output declined, derailed by draconian Covid lockdowns.

The data shows that on a subsector level changes in confidence were mixed.

Five out of eight subsectors reported higher confidence levels in the fourth quarter, but confidence levels remained below 50 index points in all subsectors.

Food manufacturers had the most noticeable upturn in confidence, with an increase from 23 to 46 index points between the third and fourth quarters. The turnaround in confidence can be explained by firm domestic and export sales amid high selling prices and improved production. High selling prices coupled with positive sales bode well for turnover growth.

The production cost indicator also moved higher — to 89% — marking the highest reading since the third quarter of 2008, and well above its long-term reading of 60%.

Though higher prices combined with volume growth are good for turnover, firm profitability could still be under pressure due to rising costs.

Absa said given the tough trading environment, it is not unexpected that confidence remained poor and could remain subdued.