Dark clouds on the horizon as PMI drops below 50

2012-07-07 08:53

The South African economy has begun to contract and growth ­predictions are being revised downwards as emerging market activity worldwide becomes limp.

Economists are calling for a culling of interest rates to help the economy weather the storms ahead.

The European Central Bank cut interest rates to a record low of 0.75% on Thursday.

Beijing cut rates by a further 0.31 percentage points to 6%, the second cut in one month.

When Gill Marcus, the governor of the SA Reserve Bank, sits down with the monetary policy committee from July 17 to 19, the focus will be on interest rates, say local ­economists.

Stanlib chief economist Kevin Lings said Marcus was likely to open a discussion about interest rates, “but will an interest rate cut really be enough?”

Lings said central banks and governments across the world, prompted by figures indicating a global economic contraction, would have to examine a number of “policy measures to encourage their domestic economies to ­compensate for the slowdown in economic activity”.

The SA Kagiso PMI figures ­released this week show that the Purchasing Managers’ Index, which is an early and reliable indication of the tempo of economic activity in economies worldwide, shows disappointing figures in South Africa.

The PMI has recorded a dramatic decline below the key 50 index point mark.

“At 48.2, the PMI lost 5.4 index points (from 53.6 points) and is now at the lowest ­level since ­August 2011, with ­almost all of the key subindices posting meaningful losses,” read the report.

The PMI for Europe also looks bleak.

Markit, which captures manufacturing indices for the ­eurozone, recorded an unchanged figure at a low of 45.1 in June. This is slightly better than earlier forecasts putting the figure at 44.8.

Mandla Maleka, Eskom chief economist, said South Africa’s ­latest PMI index showed that the country was joining the party of underperforming economies.

“A PMI reading that is above 50 indicates that there is strength in the economy, while a reading that is below 50 tells you that in the near future your economy will underperform,” said Maleka.

He said the strength of PMIs in developing countries heavily depended on the success of developed countries.

If the US and ­European countries underperform, the economies of developing countries will also be hit, he ­explained.

Maleka thinks that when the monetary policy committee meets it will not lower interest rates.

“South African interest rates are at their lowest in 30 years. However, the economy has not performed very well.

“I doubt that further lowering the interest rates will stimulate the economy,” he said.

“South Africa should try to ­stimulate the supply side of the economy instead of the domestic demand side.”

The figure recorded this June is holding at its lowest since June 2009 – as Europe’s tougher economies begin to feel the weight of a global contraction.

Figures coming out of the US are no better.

The US-based Institute for ­Supply Management issued figures from a survey this week that indicated a significant dip in ­economic activity from 53.5 points registered in May this year to just 49.7 in June.

According to the Financial Times, this figure is the lowest ­level since the recession ended in mid-2009.

The HSBC PMI for Chinese manufacturing activity also offers no solace.

Instead, it indicates a fast retreat by Chinese factories as orders in this export-driven economy are cancelled and storerooms in China fill with undelivered goods.

The Chinese index shows a further decline to 48.2 this June, from an already low 48.4 in May this year.

Beijing is expected to ease monetary policy in the months ahead to ameliorate the pain of Chinese manufacturers.

Japanese PMI follows the ­emerging global pattern. In Asia’s second-largest export economy ­after China, Reuters reports the PMI figures slipped to 49.9.

In June, the export-driven ­Japanese experienced the same problem as the Chinese, with a slew of cancellations of orders as global demand weakened.

Eurozone manufacturing activity has contracted every 30 days since August 2011.

Even German manufacturing figures indicate that Europe’s strongest and most resilient economy is showing signs of slowing, reducing economic options available to the eurozone.

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