South African factory mood surges to near two-year high

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A gauge measuring South African manufacturing sentiment rebounded to a near two-year high in April, boosted by a full month without power cuts for the first time since January 2022 and improved domestic demand.

Absa’s purchasing managers’ index, compiled by the Bureau for Economic Research, exited contraction territory and climbed to 54 in April, compared with 49.2 the prior month. Analysts surveyed by Bloomberg expected the index to edge to 50.5.

The headline index was largely propped up by improved business activity, which surged to 57.2, from 44.5 the previous month and domestic sales orders.

“More than 30 days of no load-shedding has likely supported business conditions in the factory sector,” the lender said. “In this regard, Eskom has announced that there has been sustained improvement in generation by the coal-fired plants, sufficient emergency reserves, and lower demand for Eskom power.”

South African businesses have battled almost daily load shedding for more than a year because Eskom was unable to meet demand due to poor maintenance and aging power plants.

Still, manufacturers were less optimistic about future business conditions, with Eskom warning that rotational power cuts will likely return in the winter months starting in June. The gauge for expected business conditions in six months declined to 55.7 in April, after a surge to 62.1 the month prior.

“The expectation of a return of load-shedding, relative to no disruptions currently, could explain this,” Absa said. “There might also be concerns about fewer interest rate cuts in South Africa and elsewhere compared to earlier expectations.

In its bi-annual monetary policy review last week, the central bank said South Africa’s path to lower inflation has become less certain and is being “frustrated” by slower-than-expected disinflation in food and volatility in fuel prices. This may see policymakers keeping rates higher for longer than previously expected, it said.

At the March rate-setting meeting, the reserve bank kept the benchmark rate unchanged at a 15-year high of 8.25% for a fifth straight meeting.