Manufacturing may witness Q3 contraction as demand slows

Although the Purchasing Managers’ Index (PMI) for August 2020, rose to 48.5 points, against 44.9 points in July, economic activities in the manufacturing sector still remain in slow recovery and may fuel a third-quarter contraction by the end of September.

With manufacturers still unable to access foreign exchange for importation of needed raw materials and other obligations, the hope of increased production may be dampened, even as consumer demand slows.

Analysis of the components of manufacturing PMI showed production level remaining in a contraction for the fourth month at 49.2 points in August, the same index as new orders which contracted slower from the previous month.

Suppliers’ delivery time index was at 53.0 points in August, indicating faster supplier delivery time for the fourth time while the employment level index for the month stood at 44.6 points, another contraction in employment level for the fifth consecutive months. The manufacturing sector inventories index also contracted for the fifth time at 46.1 points, the index declined in the review month.

PMI for the non-manufacturing sector stood at 44.7 points during the period, a contraction in non-manufacturing activities for the fifth consecutive months.

Jointly, the average PMI – both for manufacturing and non-manufacturing sectors for August stood at 46.6, according to analysis from PFI Capital, contracting for the fourth month since May.

With a month left to complete the third quarter, PFI’s average manufacturing and non-manufacturing PMI reading for August translates to an average of 45.35, pointing to another contraction in Q3 if September PMI (for both manufacturing and non-manufacturing sectors) falls below an average of 59.3.

The PMI is a survey of sentiments in both manufacturing and non-manufacturing sectors of the economy, and the index historically shows it possesses predictive power for the direction of growth in output. Thus, a contracting PMI most likely suggests GDP growth for the third quarter will remain in the negative albeit an improvement over the 6.1 per cent decline seen in the second quarter of the year.

“We see these developments signalling the measured pace of progress made in getting business activities back to pre-COVID levels as the economy reopens with a vaccine or cure, and multi-faceted challenges like acute dollar scarcity, the partial restoration of international linkages, depressed levels of consumer demand, etc.

“Patterns in components of non-manufacturing PMI in August were similarly pointing to the same general constraints for businesses in the economy,” the analysts argued.

Under the manufacturing sub-sector, the cement index expanded from 48.6 points in July to 64.4 points in August. Chemical and pharmaceutical products also moved into expansion territory of 52.2 points in August, from the previous month. Non-metallic mineral products, Plastics, and rubber products, Textile, apparel, leather and footwear, and transportation equipment expanded from the previous contraction.

On the other hand, electrical equipment, fabricated metal products, food, beverage and tobacco products, Furniture and related products, Paper products, Petroleum and coal products, primary metals, and Printing and related support activities remained in contraction.

For non-manufacturing activities, all sub-sectors remained below expansionary levels. The most improved was utilities which grew from 31.3 points in July to 50.0 points in August, a transition from contraction to stationary.

Accommodation and food services index rose from 43.6 points to 45.7 points, Agriculture rose from 44.3 points to 48.7 points.

Arts, Entertainment & Recreation index worsened from 65.3 points to 45.3 points, which is from an expansion to a contraction. Repair, Maintenance/Washing of Motor Vehicles also trended in a similar fashion.

Other sub-sectors including construction, education services, finance and insurance, information and communication, transportation, and warehousing among others, remained in contraction.