Manufacturing business confidence at 27

The rebound in the manufacturing sector in the first quarter had been driven mainly by exports.

Figures from Stats SA showed that manufacturing production rose 8.7% in April boosted by the motor vehicles division.

"The stimulus from exports and restocking seems to have waned to some extent and domestic demand remained weak-leaving the sector without the necessary growth momentum and resulting in broad based softness," said BER senior economist Christelle Grobler.

PMI falls

Another monthly index that measures activity in the manufacturing sector, the Purchasing Managers' Index fell by 4.1 index points to 51.1 in May, indicating that growth in the economy's second biggest sector will be strained.

The 27 index point reading of the BER's Manufacturing Survey remains at a low level and is currently 20 points below its long-term average.

The survey showed that domestic sales and orders continued to fall compared to the same quarter last year, although the pace of decline had eased.

"Producers did not foresee further declines in domestic demand and were surprised on the downside," said Grobler.

Exports drop

Export performance deteriorated, with the export sales and orders indicators losing ground in the second quarter.

Several factors, including global developments and uncertainty, the recent strike at Transnet and the relatively stronger rand exchange rate, were - according to the survey - likely to have impeded exports during the second quarter.

Production down

Production volumes did not recover with the majority of respondent to the survey continuing to report declines in both production volumes and the number of factory workers employed.

But here too, the pace of decline slowed further. An indication that while there remains fragility, the worst has been passed.

"Manufacturers indicated a below average level of finished goods stocks (in relation to expected demand), which may bode well for production volumes going forward," remarked Grobler.

Cost pressures such as the recent 25% electricity tariff hikes that became effective in April led to an acceleration of the rate of increase in average total cost per unit of production.

Domestic price increase

While manufacturers were forced to up the rate of increase in domestic selling prices in an attempt to defend profitability, Grobler said: "however, with sales frail and import competition active due to the relatively strong rand exchange rate, reliance on pricing to counter lower volumes might be hampering growth in local demand."

It was not all doom and gloom however, as respondents reported rising fixed investment. Expected investment in machinery and equipment in 12 months' time remains positive.

"This may be attributed to manufacturers taking advantage of low global inflation and the relatively strong rand exchange rate to purchase imported machinery at competitive prices, as well as possibly some labour substitution in the wake of continued pressure on labour costs," Grobler stated.

Lack of demand

The index of the percentage rating insufficient demand as a serious constraint lies at 73, only 7 points below the historic high of 80 reached during the fourth quarter of last year.

The rating of the political climate increased notably during the second quarter, while renewed uncertainty particularly on the global economic front has negatively impacted producers' expectations regarding business conditions in 12 months' time.

Only a small net majority of 4% expected an improvement, down from 22% previously.