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PMI rebounds in May, but not as much as in March

There’s ‘a huge concern about inflationary pressures globally right now, how much that is going to pass through to consumers, and what that’s going to mean for central banks’: Absa economist Miyelani Maluleke.

FIFI PETERS: The mood in the manufacturing sector improved in the month of May. That is according to Absa’s PMI index, which showed that the index rose 4.1 index points to 54.8 in May. This is kind of good news, given the setback that the manufacturing industry faced in the month of April – and that was caused by the floods in KZN, as well as intense load shedding.

We have Absa economist Miyelani Maluleke for more on the PMI numbers. Miyelani, thanks so much for your time. We have recovered some lost ground, which is welcome news but not quite enough to make up for where we’re coming from. I’m talking specifically about where PMI was in March, at the 60-point mark. So just take us through the month of May and what held back the full recovery.

MIYELANI MALULEKE: Thank you very much for having me. Look, I think it’s encouraging in the context of the drop that we saw in April, particularly when you look at critical sub-indices like business activity which measured up with a massive, massive drop in April on the back of the devastating floods that we saw in KwaZulu-Natal, but also the more intense bouts of load shedding that we experienced.

So, coming into May some of those adverse shocks in a way started to fall off. It does look like a lot of the businesses that were affected very directly by the floods started to come back, and we do see this in the headline PMI which came back to 54.8.

But, as you correctly point out, we haven’t gone back to where we were in March in terms of the pace of improvement. You remember, we were at about 60. So we haven’t recovered all of that lost ground. I think what held back this recovery a little bit here is that we’ve continued to see – and we continue to see – load shedding I think of course in terms of the intensity that in March we saw. In April we had Stage 3 and Stage 4 for a little bit. But the load shedding is still there. I think there may still be, for some businesses, lingering effects from the floods and I think that has held us back a little bit.

But it’s also worth pointing out that May was also a month in which we had that two-week strike at a major steel-manufacturing firm, and we know how critical that is for South African manufacturing. I think that’s the reason that, despite the rebound that we see in May, we don’t seem to be quite back in terms of the place where we were in March.

FIFI PETERS: I think what’s also interesting about the reports is that exports were okay. There was a nice bounce-back in exports also in the month of May, and this despite the fact that China had its lockdown. It has just come out from it now in terms of Shanghai, but many thought that could have been a real cause for concern. But it doesn’t seem to be the case. How do we interpret that – that the global economy is still demanding our stuff, or what?

MIYELANI MALULEKE: I think there are  a couple of things to that one, Fifi. One, when we had the floods there was a temporary shutdown of the Durban port; we know it is the busiest part in the country, perhaps even critical for exports. So the drop in exports that we saw come through in the April PMI data I think in part could reflect that in fact, coming into May. It’s a good thing that we were able to sort of quickly sort out issues in the port, and things quickly normalised. I think that was a huge positive, and a big support factor coming into May.

Another thing is that, although we have seen global growth momentum slowing a little bit, I think overall the global economy is still improving. If you look at what’s projected by the IMF, for instance, growth is still especially about 3.6%, so that the environment is still broadly supportive for exports. And I think that’s what we are seeing in this May PMI as well, manufacturers saying that after we got through the interruptions, port activity seems to be coming through.

That’s very encouraging, especially now when there is so much concern about what this normalisation or this tightening in global financial conditions is going to do to global economic growth.

The risks are there, but I think at this stage we are still seeing that the external environment is supportive.

FIFI PETERS: So many concerns around stagflation and recession in some corners. On inflation, though, I think another interesting element in terms of the report, the PMI for the month of May, is the fact that the Purchasing Price Index is coming back again for the second straight month, and this in a month where the oil price went crazy. I believe that the gains for oil were about 10% for the month of May, yet it hasn’t quite filtered into the price index or hasn’t filtered into the price index as strongly. So my question there is just talk to us about prices, what they’re doing, and whether the fact that the Purchasing Price Index has come back for the second month in a row indicates that the peak was already reached.

MIYELANI MALULEKE: Yes, that’s a very good point. There’s obviously a huge concern about inflationary pressures globally right now, how much that is going to pass through to consumers, what that’s going to mean for central banks. As far as the PMI is a data concern, yes, we’ve had a bit of a decline in April. We had a bit of another decline again in May.

But we’ve come at (?) a very high level – the latest number is something like 88, and that still indicates that the pace of the increase in cost pressure may not be as high as we saw in March when this particular sub-index was at a record high. But 88.1 is still relatively high and I think still does indicate to us that cost pressures on the producer side are still very strong. I think, Fifi, this is more a situation of sort of moving from a cost increase that was really bad to one that’s bad.

FIFI PETERS: All right. Okay, point taken. We are talking on the first day of the new month, the month of June. Just given everything that is happening right now, let’s maybe take stock.

Global growth is still a concern, Russia and Ukraine are still at war, and now we have Janet Yellen talking about the fact that she could have been wrong about how much inflation could have been a problem. We have a situation in which the market now is pricing in the possibility of faster interest-rate increases in the US again.

So, looking at all the dynamics that are currently at play, how does that set us up for the month of June in terms of PMI and what to expect there?

MIYELANI MALULEKE: ….As much as former chair Janet Yellen, who’s making that admission, the current chair, [Jerome] Powell himself, I think has changed his tune. For most of last year they were saying to the market that these inflationary pressures are going to be during their term transitory. But they now realise that inflation in the US has proven to be much higher than expected, and very sneaky as well. And that requires a totally different sort of monetary policy response.

I think it’s a big risk to global growth and especially given the significance of the US and the world economy. I think it’s a risk particularly for the second half of the year, but I wouldn’t see this derailing very much some of the recovery that we’ve seen domestically in the month of June, specifically.

So here I’m more worried about our domestic electricity-supply situation; it’s pretty clear that the system is very tight.

I mean, Eskom has been doing load shedding for the last little while during peak hours and I think the risk, as the utility itself points out, is always that because the system is so vulnerable they may have to escalate. I see that as sort of being a short-term risk for the domestic manufacturing sector rather than global growth.

I see global growth more as a sort of risk going into the second half of the year and into next decade.

FIFI PETERS: All right. Point taken then, Miyelani. Thanks so much. We’ll leave it there for now. Miyelani Maluleke is an economist at Absa.

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