Business confidence at factories tumbles

Kamilla Kaplan.

Image credit: Financial Mail

Lower manufacturing output will limit economic growth given that the sector makes up 12.5% of gross domestic product (GDP).

The government projects growth this year at 0.9%, almost in line with the Reserve Bank’s 0.8% forecast. This is far too low to address the high 24.5% unemployment rate.

The Bureau for Economic Research’s (BER’s) manufacturing survey — which measures confidence among producers — fell sharply to 18 points in this quarter (January to March) from 34 points in the fourth quarter of last year.

The current survey level shows that more than eight out of 10 manufacturers are currently dissatisfied with prevailing business conditions.

"Most of the headwinds faced by the sector are unlikely to reverse in the short term, which suggests that manufacturing business confidence may remain subdued over the near term," BER economist Lisette IJssel de Schepper said.

Manufacturing output and jobs are negatively affected by low global and domestic demand, weak commodity prices and rising input costs including for labour and electricity.

Another key indicator of activity in the manufacturing sector — the Barclays purchasing managers’ index (PMI) to be released on Friday — is also expected to point to the problems lying ahead for output in the sector.

The index was below 50 in both January and last month. A below-50 reading indicates a contraction in manufacturing activity.

The PMI March reading was also likely to remain below 50 at an estimated 48, Investec economist Kamilla Kaplan said.

The PMI reading for the first quarter as a whole would then average 46.2, signalling a continued slowing in manufacturing-sector activity, Ms Kaplan said. The below-50 reading on a quarterly basis suggested that the manufacturing sector was "at risk of detracting" from GDP in the first quarter of this year, she said.

On the BER manufacturing survey, domestic sales and order volumes declined compared to the same period last year. Sales and order volumes could continue under pressure given expectations for demand to remain weak on slowing growth in spending by consumers.

Consumer disposable incomes were eroded by rising food and electricity prices, inflation and higher interest rates. The Reserve Bank monetary policy committee increased interest rates by 50 basis points in January and again by 25 basis points this month.

Manufacturers were still able to push for higher domestic selling prices despite lower sales and order volumes, the BER said.

This suggested that higher input prices are forcing producers to pass costs onto consumers.

Exports were also under pressure, with the export sales volume indicator declining for a second straight quarter. "This was despite the rand exchange rate weakening significantly since the previous survey," IJssel de Schepper said.

Despite a slow export performance, manufacturers were at least able to push up export selling prices, the BER said.

Production is also underperforming. The volume indicator declined further in line with persistent weak demand. This is also in line with actual manufacturing production data, which showed that output decreased by 2.5% in January compared with January last year.