Heading for a new normal: Key global manufacturing centres cling to expansionary territory

Latest manufacturing gauges offer cause for cautious optimism because, while the US and China saw headline declines, confidence is reappearing and both remain in expansionary territory. South Africa’s PMI increased, but revealed a softer underbelly.

From the US through China to South Africa, January manufacturing activity gauges – arguably the most timeous and eagerly watched manufacturing sector indicators – have all been encouraging despite undershooting expectations in various respects.

US and China indices experienced “modest declines”, while South Africa saw a slight increase at a headline level, but underneath were some worrying signs.

Critically, though, all managed to remain in expansionary territory (above 50) notwithstanding a torrid start to the year from a Covid perspective.

South Africa saw a slight increase at a headline level but the US and South Africa have had to clamp down on rampant infections, while China has also seen sporadic flare-ups in some regions.

In the US, the January Institute of Supply Management headline manufacturing index slipped to 58.7 from 60.5, lower than the expected 60.

In China, January PMI data slipped to 51.3 from 51.9 in December – marginally weaker than the expected 51.6 – and the headline Caixan manufacturing PMI also declined to 51.5 from 53.

Regional surveys — the Chinese PMI and the ISM have all softened.

Source: Macrobond, ING

South Africa’s Absa PMI Index rose slightly in January, but key subcomponents of the survey signalled underlying weakness in activity. These included a deterioration in supplier delivery times, a slower inflow of new orders and another decline in new export orders, which, according to Nedbank economics department,  is likely a function of the reimposition of lockdown measures in a number of SA’s key export markets.

The PMI results, however, highlight that economies are managing to do a better job at balancing the economic versus health challenges that have dogged the world since the pandemic arrived in early 2020 and economic lockdowns had such sudden and devastating effects.

So while it may seem like a wobbly economic start to the year, the bedrock of economies, namely the manufacturing sector, looks to be relatively robust. Should vaccination rollouts continue moving forward, there could be cause for the optimism that is emerging too.

According to the UBS CIO Investor Sentiment Survey, investors who were polled expressed confidence in the US economy, an attitude premised on the belief that society will return to “normal”.

More than two thirds of investors believe that a return to normal won’t happen until the second half of the year

The survey also found that business owner optimism had increased, with 79% reporting optimism in their own business over the next 12 months.

Says UBS: “Although strict restrictions on business activity are still recurring in 2021, business owners are seeing a decrease in challenges related to Covid-19. They also believe the (American) election result was favourable for business and more than one third have seen their businesses begin to pick up momentum.”

Apparently, more than a third of the respondents planned to hire in the next year, while half intend to maintain current workforces. UBS points out that almost half plan to invest more in their businesses, which they interpret as a reflection of their growing optimism in the economy.

Employment optimism was also reflected in the US manufacturing gauge, with the employment component rising to 52.6. ING says this is the best reading since June 2019, “so it looks as though the manufacturing sector will be contributing positively to overall economic activity in the first quarter”.

In South Africa, manufacturers were also more upbeat about the outlook, according to the Absa economics department. Despite the somewhat muted start to the year, they say, the sub-index measuring manufacturers’ expectations six months into the future improved to 59.2 in January from 52.9 in December.

“With new Covid-19 infections slowing domestically, this improvement may indicate expectations of some relaxation of the current restrictions and perhaps hopes that a vaccine rollout around the world would underpin a more durable economic recovery over the remainder of the year.”

Meanwhile, Nedbank believed business optimism was underpinned by expectations of a strengthening global economy and thus increased export orders, which slid back slightly in the January PMI.

Absa points out that Eskom’s indication that it expects severely constrained electricity supply, and sees an elevated risk of more waves of modest rotational power cuts over the coming months, are likely to remain an overhang for the South African economy for some time.

Another concern that deserves a watching brief in the months ahead is a sign of rising price pressures that are becoming evident in this latest batch of manufacturing indicators. In the US, this was reflected in the prices paid component, as well as a surprise increase in the personal consumer expenditure deflator and the employment cost index late last week. ING chief international economist James Knightley says these will keep the markets’ hawks wary and the Federal Reserve cautious.

It is not overly concerned by these signs of emerging upward pressure on prices. “While we think it is too early to be especially concerned, we do predict that headline inflation will rise above 3% and core inflation above 2.5% in coming quarters, as price levels in a vibrant re-opened economy contrast starkly with 12 months before when the stresses of the pandemic saw companies slashing prices to generate demand and cash flow.”

In South Africa, Nedbank points out that manufacturing cost inflation as reflected in the prices sub-index of the Absa PMI, strengthened in January, rising by 12.2 index points – the strongest pace of inflation since mid-2018.

The bank’s economic division identified the weaker rand exchange rate and the higher international Brent crude oil price as the primary contributors.

“Additionally, international PMIs for January have shown large increases in cost inflation linked to constrained supply. It is possible that local manufacturers are being similarly affected.”

The picture painted by the January manufacturing indicators are cause for cautious optimism. The best-case scenario would be the sector gaining sustainable momentum through the year; laying the groundwork for a resurgence in the largely decimated services sector.

Only then will we be able to say more confidently that society is close to returning to its new/next “normal”. DM/BM

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