The seasonally adjusted Kagiso purchasing managers’ index (PMI) rose for the third consecutive month in October, increasing to 50.1, compared with 49.5 in September.

Kagiso Asset Management head of research Abdul Davids pointed out that this was the PMI’s best level since November 2013, adding that the increase signalled a relatively strong start to the fourth quarter of the year.

Further, the new sales orders index increased from 48.7 to 50.2 index points in October, confirming that domestic demand was slowly recovering from production stoppages related to industrial action in the mining and manufacturing sectors during the first seven months of this year.

The Manufacturing Circle stated that, while the PMI showed manufacturers were more upbeat about domestic business conditions, that optimism was tempered by concerns over the sustainability of the recovery, and over the degree to which State-owned power utility Eskom’s recently decreased generation capacity could interrupt or decrease production.

“The slight improvement in the eurozone flash manufacturing PMI to 50.7 and the Chinese flash figure to 50.4 is also supportive of stronger external demand. However, Europe and China are underperforming compared to the US, where the flash PMI came in at 56.2 and new sales orders stood at a robust 57.1 index points.

“Unfortunately, the US is not a large direct importer of South African manufactured goods, but an improvement will support the overall global growth outlook,” Davids stated.

Meanwhile, the inventories index also rose sharply in October, which Davids said suggested that purchasing managers were confident that demand would be sustained in future.

This was supported by the 5.1 index point rise to 60.4 in the index measuring expected business conditions in six months’ time.

However, Davids noted that inventories marginally exceeded new sales orders and the PMI leading indicator, therefore, remained slightly below one.

Further, the rise in demand was not yet matched by a strong improvement in output and the business activity index nudged down to 50.3 from 50.5, while employment conditions in factories also deteriorated slightly, which led to a decline in the employment index to 46.1 points from 47.5 points previously.

The Manufacturing Circle said anecdotal evidence suggested that the decline in the employment index could be as a result of increased mechanisation, substituting some previously locally manufactured inputs with imports and, in certain instances, business discontinuation as a result of instability in the labour market.

“Manufacturing would benefit from improved implementation of local procurement initiatives across government, with the private sector and consumers following suit. Manufacturers will also be watching with keen interest the degree to which appetite may be developing to bring much-needed stability to the labour market at the Labour Indaba led by Deputy President Cyril Ramaphosa,” the Manufacturing Circle said.

Davids also noted that the price index had fallen to 76 during October, following four consecutive increases.

“Lower domestic petrol and diesel prices following the sharply lower international crude oil price, and a slight strengthening of the rand exchange rate most likely alleviated some of the cost price pressures,” Davids commented.