Absa forward PMI on a roll

In June, the Absa/BER purchasing managers’ index (PMI) for business expectations in manufacturing in six months’ time reached its highest level since February 2022.

The June reading of 68.1 represents a significant improvement on the average index value of merely 53.2 during the preceding 24 months and promises to further boost the exceptionally strong recovery of manufacturing sales since the middle of last year. Ever since the relentless rise in interest rates, confidence in the country’s key manufacturing sector has been under pressure, with the six-month forward PMI dropping to below the neutral 50 mark on five occasions.

Exhibit 1 | Absa/BER six-month forward purchasing managers’ index (PMI) for business expectations

Exhibit 1 4 July 2024

Note: Quarterly average. Source: Absa/BER. Data as at June 2024. Past performance is not a reliable guide to future performance. For illustrative purposes only and not indicative of any investment.

Several other key economic indicators are also reflecting an improved outlook for higher growth, most likely because of the historic transition to a government of national unity that is committed to preserving South Africa’s democratic constitution and the principle of private property rights. These include the country’s ten-year bond yield, which has shed 114 basis points since the last week of April, providing ample space for the lowering of the Reserve Bank’s repo rate.

Further proof of the new-found mood of optimism in the economy is the recent performance of the rand. Between the first of March and the end of June, none of the 16 key currencies monitored by Currencies Direct outperformed the rand against the greenback, with even the Euro, the Chinese yuan and the Japanese yen taking a hit against the world’s dominant currency.

This time around, rand strength was not based on any relative weakness in the US dollar’s value, as the dollar index (DXY) strengthened by almost 2% to 105.9 over the past four months, leaving most of the world’s key currencies floundering. Although the rand is likely to remain volatile against the dollar, several leading financial institutions are predicting a value of below R18 by the end of the year.

Further good news on the manufacturing front is the announcement by steel producer ArcelorMittal South Africa (AMSA) that it will continue to operate its longs business, the closure of which was deferred earlier this year. In steel industry terminology longs business refers to the manufacturing of steel products such as wire, rod, rail, and bars as well as certain types of structural sections and girders, mainly for use in construction.

Any closure of AMSA’s longs business would have been devastating for the 3,500 workers employed at the plant, as well as the town of Newcastle, in KwaZulu-Natal, where AMSA’s factory is located. It would also have impacted negatively on the whole of the country’s manufacturing and construction industries.

Reasons for the decision to keep the plant fully operational include the securing of a working-capital facility of R1 billion for a 12-month period, some improvements in Transnet’s performance, and a provisional safeguard duty of 9% on certain hot-rolled steel products.

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Author: Dr. Roelof Botha

Economic Advisor of the Optimum Investment Group. He navigates complex topics with clarity and optimism and with more than 40 years of experience, including  Finmedia Economist of the Year winner and Advisor at National Treasury, offers insightful perspectives on South Africa’s economic and political landscape.