The seasonally adjusted Kagiso PMI rose to 47.6 index points in October from a revised 45.9 during September.

Andre Coetzee, head of fixed income at Kagiso Securities said: "Last month's 1.7 index point gain is on top of a 6.4 point jump in September and confirms that SA manufacturing output is moving back towards expansionary territory."

This is in line with recent company results in the manufacturing sector – ArcelorMittal SA reported that sales volumes (albeit from very depressed levels) rose by 19 percent quarter-on-quarter in the three months to end September 2009.

After operating at only 60 percent of production capacity in the first half of 2009, ArcelorMittal's output capacity rose to 70 percent during the third quarter of 2009.

While the domestic manufacturing sector continues to lag international developments (the global PMI has been above 50 since August 2009), a sustained improvement in global prospects should in the foreseeable future contribute to a return to growth of the SA factory sector. The US economy, for example, technically exited recession during third-quarter 2009 following better-than-expected growth of 3.5 percent q-o-q (saar).

Coetzee said: "If the rand sustains the slight weakening bias seen of late, it could also assist the speed of recovery in SA manufacturing production volumes".

The PMI expected business conditions index, which rose for seven months in a row to September 2009, lost some ground in October (to 67.9 from 70.3 points).

"This should be seen as a normalization following the sharp increase during September and may to a degree be in reaction to some recent mixed signals on the global and domestic economic data front, which have (again) raised some concern about the strength/sustainability of the recovery" said Andre Coetzee.

Output volumes confirm the earlier jump. After increasing by a robust 9.7 index points in September, the seasonally adjusted business activity index rose slightly further to 48.4 during October – the highest level since April 2008.

Coetzee said: "Similarly, the seasonally adjusted new sales orders index extended a 7.7 point gain in September by rising another 2.3 index points to 48.9, which is also the best reading since the second quarter of 2008.

"While global demand in all likelihood has already returned to the system, domestic demand should also improve during fourth-quarter 2009 with both the SA Reserve Bank and National Treasury forecasting an end to the SA recession during the final quarter of the year."

The improved demand conditions are also reflected in purchasing commitments, which saw a second consecutive month of strong gains to reach 50 index points.

The Kagiso PMI price index remained below 50 at 47.6 index points during October, confirming a continuation of producer price deflation and raising the possibility of (as was the case in September) another faster than expected fall in producer prices during October.

The encouraging trends of the headline Kagiso PMI results are also reflected in a further upturn in the seasonally adjusted employment index - from 42.0 in September to 45.0 during October.

"A further rise in the upcoming months will hopefully signal that factory job losses moderated from the steep 150 000 decline reported in the 2009, third-quarter Labour Force Survey," Coetzee said.

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