The seasonally adjusted Kagiso PMI declined below the all-important 50 index point mark in June to reach 48.4, the first reading of less than 50 since October 2009. After reaching a peak of 60.4 in February 2010, the PMI has now declined for four months in a row. The recent trend for the SA PMI is quite different from international developments – the global PMI rose from 55.4 in February to 57.2 during May.

Despite the easing in recent months, the average SA PMI for 2010Q2 remained above 50 at 51.6, down from the 56.5 recorded in the first quarter of 2010. While the Q2 average suggests that the sector continued to expand, it does point to an easing in momentum.

The June PMI weakness was widespread amongst the most important PMI subcomponents with the business activity index down another 3.8 points to well below 50 at 45.2. Reduced working hours related to the FIFA World Cup may explain some of the decline - the fact that new sales orders (although easing somewhat) remained above 50 and the backlog of sales orders index increased somewhat, indicate that there was still some demand for manufactured goods in June. These trends hint that there may be some once-off factors that can explain the business activity decline.

However, it is unlikely that time off to watch the soccer can explain the entire decline - some other factors also seem to be at play. Of importance is that purchasing managers have been scaling back their expectations for future business conditions. While the initial fall from the high (74) reached for expected business conditions in February can be seen as a normalisation to more reasonable levels, the further decline of late (to 59.5 in June) may indicate that the recent bumps (European debt crisis, fears about a Chinese growth slowdown) experienced in the global recovery may be weighing on domestic managers.

Tied in with this are indications that – despite stronger global demand - factory exports continue to feel the pinch from the strength of the rand exchange rate, particularly versus the Euro. The rand (on average) was 17% and 11% stronger versus the Euro and US dollar during 2010Q2 compared with the corresponding period in 2009.

For further information:

André Coetzee, Kagiso Securities
Tel: (011) 341 3240

or

Hugo Pienaar, Bureau for Economic Research
Tel: (021) 887 2810 1 July 2010