Slow recovery in manufacturing sector heightens risk of business closures - survey

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  • The Absa Manufacturing Survey for the third quarter of 2020 shows that some subsectors of SA's manufacturing industry are recovering.
  • However, the rebound may be too slow for others, who may have to restructure or permanently close.
  • The easing of lockdown restrictions has bolstered activity in the industry. 

Improved business conditions and confidence levels in SA's hard-hit manufacturing industry point to the start of a recovery. But there is a risk the rebound might be too slow for some producers who are now at risk of permanent closure, a survey has found.

The Absa Manufacturing Survey for the third quarter of 2020 was released on Wednesday. It shows a general improvement in activity in the industry, coinciding with the easing of lockdown restrictions. The survey is conducted by the Bureau for Economic Research and covers approximately 700 businesspeople in the manufacturing industry. It was conducted between 12 and 31 August 2020.

According to the survey - business confidence levels for the industry rose to 22 points, their highest level for the year to date.  This is an improvement from a record low of 6 index points recorded in the second quarter. The index ranges from zero to 100 – zero reflects an extreme lack of confidence while 100 reflects extreme confidence, the report noted.

The latest reading is in line with data from Stats SA as well as Absa's Purchasing Manager's Index which have been trending upwards since the second quarter – when the strictest lockdown restrictions were in place.

August's PMI rose to 57.3 points, up from 51.2 points in July, Fin24 previously reported. A point above the 50-mark represent and improvement in activity.

"The majority of South African manufacturers are still experiencing production levels lower than last year," said Justin Schmidt, Absa's head of manufacturing sector.

"However, there is a significant improvement quarter-on-quarter, meaning that fewer respondents experienced lower production, so the worst may be behind us. There are still a lot of constraints, but domestic and export sales have started to improve which have supported South African manufacturers."

Survey respondents also noted persisting significant supply chain disruptions, despite the reopening of the local and global economy. They have been experiencing longer delivery periods and a lack of payment, which has impacted their cash flow.

"It is likely that as more staff return to work, continued social distancing regulations may result in fewer employees working at a time as well as greater inefficiencies, which could slow the recovery in output," the report read.

Schmidt said that although the sector was moving in the right direction, there is "a lot of work ahead" to ensure the it does not have a protracted recovery. This includes "fast tracking new energy supply and delivering on regulatory reform across multiple sectors," Schmidt said. An environment that will drive demand for manufactured goods needs to be created.

However demand levels are still in the doldrums. August vehicle sales declined by nearly a third from the previous year, consumer confidence is at record lows and their appetite for lending has been suppressed, Fin24 previously reported.

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