An analysis of the relationships between the Purchasing Managers Index (PMI), economic growth and employment in the manufacturing sector in South Africa

Abstract

Employment growth in the South African economy has been dismal, and unemployment has been gradually increasing since the 2000s. The high rate of unemployment at more than 27 percent, is mainly due to weak gross domestic product (GDP). The purpose of the study was to analyse the relationships between the purchasing managers' index (PMI), economic growth and employment in manufacturing sector in South Africa. The study employed time series data from the first quarter of 2000 to the fourth quarter of 2016. The results of the Correlation analysis indicate significant positive relationships between the variables. Using Bounds test for co-integration, the results indicated that a long-run relationship exists between the variables. A 1 percent increase in GDP could lead to a 0.30 percent increase in employment in manufacturing, and a one percent increase in the PMI could result in a 0.37 percent increase in manufacturing employment. In the short-run, only GDP and not PMI is a significant predictor of employment in manufacturing. Based on the results from the Granger causality test, a bi-directional causality was found between manufacturing employment and PMI. From the results it can also be concluded that the PMI is still a reliable leading indicator of macroeconomic conditions. A key strategy that can improve employment in the South African economy would be to enhancement economic growth and the promotion of the manufacturing sector by means of incentives.