PMI rises to 51.8

Leading PMI expects continued recovery

The PMI rose for a third consecutive month, to 51.8 from 52.8 in September and 48 in August, and is the highest reading since November 2013. On a three month moving average basis (3mma), the PMI tends to lead manufacturing production growth by 3 months, and indicates that Q4:14 should see a sustained recovery in manufacturing (fig1). This is in line with our expectation that manufacturing and mining will pick up in the fourth quarter making up for lost production in the first eight months of the year, due to strikes.
A continued recovery in the PMI is anticipated by the 3mma of the leading PMI indicator, which the BER measures as new orders minus inventories (fig 2). The leading indicator implies a continued improvement in the PMI through Q4:14. Manufacturing in turn should improve through to the end of Q1:15.
We also look at a ratio of business activity to inventories, which rose markedly in September, to near its long term moving average for the first time since December 2013, providing support for our view that a recovery in GDP growth will be supported by a turn in the inventory cycle (fig 3). Although the ratio continued to rise on a 3mma basis, it moderated in October as inventories outpaced the pickup in output, which fell marginally by 0.2pts to 50.3.
Inventories, which usually lag actual output, picked up sharply in October by 6.3points to 56.3 we assume in anticipation of a more sustained recovery in demand (fig 5).
As can be seen in figures 6 and 7, indicators of demand rose sharply; new orders increased by 2.6pts to 55.2; purchasing commitments increased by 2.7 pts to 53.3; and backlog of new orders was up 2.6pts to 39.6. In line with the rise in demand, and possibly the break in strike activity, expectations rose 5.1ppts to 60.4. We note that the BER has re-estimated the seasonal factors, resulting in an upward revision in the new sales orders index in September, suggesting that demand had already picked up in that month.
QLFS labour force data released last week indicated that the formal manufacturing sector lost 4,000 jobs during the third quarter of 2014 and compared to Q3:13, 38,000 factory sector jobs were lost. The deterioration in the PMI employment index from September to November suggests that the manufacturing sector is unlikely to regain these jobs in the fourth quarter. However, we note the relationship between expectations and employment in figure 9 which suggests that if expectations remain above 60 for a sustained period, employment may recover to above 50.
As expected the prices component of the PMI, which has been rising since May, fell 2.6pts to 76 as global disinflation has countered the inflationary effects of a weaker exchange rate. The PMI’s prices index usually leads the PPI inflation rate, which slowed to 6.9% y/y in September, from 7.2% y/y in August (fig 8). Consequently, we expect the deceleration in PPI to have to have persisted in October. Electricity price increases of 12.7%, which will come into effect in 1 April 2015, may impact the survey results for the prices component next year.
The stronger PMI data is supportive of a more balanced, export led growth path, as opposed to reliance on debt fuelled consumption, and implies a narrowing of the current account deficit in Q4:14, which should reduce currency volatility.

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