By Ntando Thukwana.
A gauge measuring South African manufacturer sentiment slumped to the lowest level in seven months over concerns that escalating hostilities in the Middle East could impact demand.
Absa Group’s Purchasing Managers’ Index, compiled by the Bureau for Economic Research, remained in contractionary territory for a second month. It fell to 46.8 in July from 47.3 a month earlier, the Johannesburg-based lender said in an emailed statement on Monday.
The survey was conducted in July, when the conflict between the US and Iran reignited after a brief respite. The war expanded to new maritime chokepoints in the Red Sea, while traffic through the Strait of Hormuz, a key trade artery through which a fifth of global oil and liquefied natural gas shipments pass, has become increasingly constrained.
The conflict has led to wild swings in the oil price. It is currently trading above $84 a barrel from about $72 a barrel at the start of last month.
“The renewed escalation of tensions in the Middle East, together with higher oil prices following June’s lows, likely contributed to the deterioration in sentiment,” the lender said. “However, the sharp decline also suggests that manufacturers remain cautious about the durability of the recent improvement in activity.”
The gauge tracking expected business conditions in six months’ time declined to 49.3 in July from 56.6 the previous month.
New sales order rose to 44.1, from 40.6, reflecting improved demand locally, while business activity increased for a second straight month to 48.8 from 45.6, boosted by an up tick in production.
“Domestic demand and production continued to recover, while easing cost pressures offered further relief,” Absa said. “However, subdued confidence, weak export demand and continued inventory drawdowns suggest manufacturers remain cautious about the sustainability of the recovery.”
The purchasing price gauge moderated in July, suggesting that the worst of the oil price shock has passed, barring any further upsurge in global energy costs, though, input costs remain elevated relative to before the war, the lender said.
“However, the increase in diesel prices later this week will put renewed pressure on costs,” it said. “If recent rand weakness is sustained, that would also put upward pressure on imported goods costs.”