Manufacturing data may help SA avoid a technical recession

Manufacturing Circle executive director Philippa Rodseth hopes signs of growth show the sector is stabilising.

Picture: Madelene Cronje

Output in May accelerated 4% compared with a year ago, the highest rate since July 2015, from 3.1% in April, according to Statistics SA data released on Tuesday.

"We hope that these signs of growth are an early indication that the manufacturing sector, which is essentially still fragile, can move towards stabilising and strengthening. We, however, always need to be cognisant of external factors which impact on local and global demand and, therefore, manufacturing output," industry body Manufacturing Circle executive director Philippa Rodseth said.

Finance Minister Pravin Gordhan told a South African Chamber of Commerce and Industry meeting on Tuesday that he was "a little optimistic" about economic growth in the second quarter following a 1.2% decline in the first quarter.

Economists, however, warn that while the improvement is welcome, headwinds remain for the sector because commodity prices and demand have yet to fully recover.

Conditions for manufacturers remained tough, particularly given the prospect of a strike in the sector, First National Bank senior industry analyst Jason Muscat said.

He expected manufacturing data for the rest of 2016 to "be choppy, even in the absence of strikes".

Nedbank economist Busisiwe Radebe agreed, saying that although the better-than-expected production data in May were encouraging, conditions were expected to remain subdued in 2016.

Manufacturing production, like mining, was likely to continue being adversely affected by low commodity prices that were unlikely to "reverse convincingly" in the next few months, Radebe said. Considerable global excess capacity and rising domestic production costs would also affect production negatively.

Although manufacturing output is expected to remain under pressure in coming months, a key leading indicator of activity in the sector suggests that production increased again in June. The Barclays purchasing managers’ index rose to 53.7 index points in June from 51.9 in May. An above-50 reading signifies improvement in manufacturing activity.

The manufacturing and mining sectors have been in decline for the past few years and have been the sectors to lose the most jobs.

"The manufacturing sector remains fragile, and in this environment, we hope to see as many jobs retained in the short term as possible," Rodseth said.

The government has been offering multibillion-rand incentives to boost manufacturing including pumping money into the development of black industrialists.

New research by the University of Johannesburg’s Centre for Competition, Regulation and Economic Development found that barriers to entry for small businesses and black industrialists were still prevalent.

Barriers to entry were identified as consumer behaviour, exclusionary conduct by incumbents, risk aversion in financing entrants, and access to markets and value chains. "The challenge for black industrialists is that they are getting finance, but there isn’t an environment which allows them to bring their products to market," centre director Simon Roberts said.

The centre proposes changing regulations, amending the Competition Act, establishing a risk fund and opening routes to markets.