SA Industrial Policy: Under Pressure After April PMI Slump

PMI Deterioration: A Snapshot

The Absa PMI dropped to 44.7 in April, sinking further into contraction and marking six consecutive months below the 50-neutral level. All sub-indices worsened:

• Business activity plunged 8.3 points to 40.
• New sales orders collapsed by 12.8 points to 36.1.
• Employment remained in contraction at 42.9.

This paints a stark picture: a sector starved of demand, burdened by costs, and constrained by uncertainty.

Structural Constraints: What’s Going Wrong?

1. Demand Weakness & Trade Headwinds

• Global tariffs, a slow EU economy, and domestic VAT disputes have all throttled external and internal demand.
• Export orders are down, and there’s evidence that import competition has eroded local manufacturing resilience.

2. Energy Reliability Still Uncertain

• Chronic load-shedding has been an ongoing industrial drag.
• While the Electricity Minister’s optimism about winter supply is welcome, credibility is low until real, consistent generation stability is delivered.

3. Logistical & Regulatory Burdens

• Transnet bottlenecks persist.
• Manufacturers face regulatory hurdles, labour rigidity, and costly compliance structures that undermine competitiveness.

Manufacturing Production Data: What to Watch

Thursday’s manufacturing production release for March could either reinforce or slightly temper the PMI’s pessimism. However, given:

• Earlier mining and manufacturing data weakness, and
• The broader disinflationary pressures, driven by weak demand,

…it’s unlikely the figures will dramatically diverge from PMI sentiment.

Silver Linings: Car Sales & Oil Prices

New Car Sales: Anomalous Upside

• April car sales came in stronger than expected, providing rare good news. This may reflect:
  • Pre-buying ahead of possible price hikes
  • Promotional incentives
  • Less sensitivity in consumer durables due to pent-up demand

However, this is unlikely to offset the broader industrial weakness unless it proves durable.

Oil Collapse: Macro Windfall

• Oil below $60 per barrel offers huge relief:
  • Helps contain input cost inflation
  • Improves real disposable incomes
  • Supports bond inflows and potential ZAR appreciation

This will ease inflationary pressures, which, in tandem with ZAR strength, boosts the case for rate cuts—already priced into FRAs across the curve.

FX Market Insight: ZAR Regains Ground

ZAR Undervaluation Correcting

• Spot: 18.3650
• Range: 18.2850 – 18.5650

Risk sentiment has improved, with:

• Reduced budget chaos
• GNU cohesion
• Improved carry attractiveness (per ETM’s index)

The ZAR has begun regaining lost ground and could approach fair value near 18.0000, barring any FOMC or budget surprise.

Fixed Income Perspective

Bond Market Narrative

• Gains are driven more by budget optimism than rate cut expectations.
• Deficit pressures remain, but if the third budget delivers credible reform, local debt could outperform.
• Global rate easing (BoE, ECB) and Fed’s cautious stance are reinforcing downward yield pressure.

Conclusion: Time to Rethink Industrial Strategy

The sustained contraction in PMI reveals that SA’s industrial base is eroding, not just cyclically, but structurally. The solution likely requires:

1. Energy reform that delivers stable, cost-effective supply.
2. Trade policy alignment to buffer against global shocks.
3. Simplified regulations and incentives for domestic manufacturers.
4. Infrastructure upgrades, especially at ports and logistics networks.