South Africa factory index suggests price pressures have peaked

An index tracking purchasing prices in South Africa’s manufacturing industry fell to its lowest level in more than three years in December, suggesting that cost pressures have peaked.

The gauge declined to 64.4 from 75.9 in November, Absa Group said on Friday. That’s the lowest monthly reading since November 2019, before the coronavirus pandemic disrupted supply chains and a week of deadly riots, looting and arson sent prices soaring.

The “steep downturn” was supported by lower oil prices and a stronger rand relative to the prior month, and bodes well for a continued moderation in producer price inflation in the first few months of 2023, the Johannesburg-based lender said. The annual producer and consumer price indexes rose by 15% and 7.4% respectively in November, Statistics South Africa data show.

The decline in the producer price index stoked optimism among manufacturers, with the gauge tracking expected business conditions in six months’ time rising to 54.9 in December from 51.7, Absa said.

The overall purchasing managers’ index rose to 53.1 from 52.6. While an outcome above 50 signals expansion, the “underlying picture is more mixed,” it said.

Sustained and intense power outages were a drag on the sector, contributing to a further deterioration in the business activity index.

The supplier deliveries index increased while new sales orders dropped, suggesting renewed friction in supply chains. The index is inverted so slower deliveries, often due to higher demand for goods, cause the measure to increase, according to Absa.

“There is a likelihood of further near-term global supply chain disruptions stemming from the rapid reopening of the Chinese economy that has resulted in surging Covid-19 infections,” it said.

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