Manufacturing boosted by motor industry

However on-the-month production was still weak, contracting by a seasonally adjusted 0.6% compared with a revised increase of 2.9% m/m in December.

Stanlib economist Kevin Lings noted that the January reading was worse than market expectations for an increase of 0.9% m/m.

The expectations for a further rise in manufacturing during January was based on an increase in the Kagiso PMI index, he said.

Andre Roux, head of fixed income at Investec Asset Management, said the surprising drop of -0.6% in production on the month is disappointing and goes against the grain of most recent data releases such as the PMI that point to an acceleration in the pace of economic recovery.

"The recovery is undoubtedly still under way. Nevertheless, it points to the possibility that the recovery may not be as strong as everyone might have wished.

"It leaves the Reserve Bank with a dilemma. A further cut in rates cannot be ruled out when the MPC meets later in the month," he said.

Johan Rossouw, Group Economist at Vunani Group, noted that while the manufacturing output picture is being dominated to some extent by the recovery in the motor industry, the overall picture does point at a more general improvement.

Nedbank economists noted that the motor vehicles and parts industry remained the main driver of growth in manufacturing production, with output rising by a 34.2% over the year following 32.3% increase in December.

Production of basic iron and steel continued to increase, up by 13.1% y/y following a 10.3% growth in December, partly reflecting better demand from industrialised countries.

"Admittedly, underpinning factors over the first half of the year like an extremely low base of calculation, artificially high rental vehicle demand due to the FIFA Soccer World Cup, general restocking etc are issues to keep in mind as potential down-side growth risks over the latter half of the year.

"Nevertheless, we remain cautiously optimistic that most of the recent momentum should be carried through over the latter half of the year as the domestic consumer gradually recovers," Vunani's Rossouw added.

Kgotso Radira, Economist at Investec Group, noted that while conditions have improved in both the manufacturing and mining sectors, the outlook still remains uncertain as it is largely dependent on the pace of recovery in external demand.

Higher production costs from the electricity price increases could hamper the pace of recovery and the sectors' competitiveness.

Economists agree that given recent signs of improvement in the local PMI readings, relatively low inventory levels, and some pick-up in world demand, manufacturing activity levels to continue to recover in the coming months.