Manufacturing still too weak

"The initial improvement in output was in all likelihood underpinned by new export orders. Survey data reveal that new export orders disappointed in Q4.

"Moreover, given the high levels of insufficient demand which is keeping capacity utilisation levels relatively low, investment and employment prospects remain slim. Output is likely to register at -14.2% y/y for this year and around 3.5% y/y in 2010," said economist from Standard Bank, Danelee van Dyk.

She was reacting to news that the physical volume of manufacturing in South Africa in October was reported at an improved 9.3% year-on-year (y/y) from 11.4% in September.

The seasonally adjusted manufacturing production index for October 2009 is the highest thus far for 2009.

The seasonally adjusted manufacturing production for the three months ended October 2009 increased by 1.6% compared with the previous three months ended July 2009, lower than the 2.7% increase in the third quarter of 2009.

Higher production levels were reported by six of the ten manufacturing divisions during the latest three months, said Stats SA.

Economist from Citigroup Jean-Francois Mercier says that the increase on the month in manufacturing of 0.4% from 3.1% before should contribute positively to GDP growth for the second month running.

He says the data points to a recovery from the cyclical lows of the second quarter, but it will not affect expectations for a moderate economic recovery.

The seasonally adjusted Kagiso PMI increased to 50.3 index points in November from 47.6 during October, ending a record run of 18 months of below 50 index point readings. November had, however, seen the fourth consecutive gain, indicative of the recent trend and showing that a trough had been reached.

The PMI is a good leading indicator to manufacturing activity in the economy.

The manufacturing sector makes up 14.6% of South Africa's GDP and is the second-biggest sector in the country, but has been slipping.

General government services has been sneaking up on it and now accounts for 13.6% of GDP. Manufacturing output, though, rose 7.6% in the third quarter from the second.

A developing country needs a strong manufacturing sector to achieve sustainable growth it does not need a gargantuan government sector that by definition is inefficient.

The data hopefully points to a change in the cycle where manufacturing can start heading fast to positive growth levels. Government should be supporting it to get there. The future of the country and sustainable jobs depends on this happening.

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