Manufacturing to show World Cup knock

Absenteeism due to the World Cup and weak demand are likely to have weighed on the economy's second-biggest sector, analysts say.

Slow output

SA's purchasing managers' index (PMI) - a reliable health gauge for the sector - suggested that manufacturing activity shrank in June for the first time in eight months. The index also pointed to a contraction last month, albeit at a more sedate pace.

Consensus forecasts from Bloomberg predict that output fell 0.2% during the month, while the increase compared with the year- earlier month slowed to 6.6% from 7.9% during May.

Citigroup economist Jean-Francois Mercier sees a sharper fall in production of 1% in June, with the annual rise slowing to 6.5%.

"June was the month when most World Cup games were held and we suspect that worker absenteeism (as well as hours allowed by management to watch games) depressed activity in those sectors not directly related to the event."

In Brazil, Citigroup believes that the event lopped as much as 0.7 percentage points off industrial production in June.

Business weak, manufacturing weak

"If anything, the weak reading of the PMI index for business activity in that month suggests that manufacturing output was quite weak in SA too," Mercier says.

In June, the business activity component of the PMI dipped to 45.2 from 49, falling well below the neutral 50 level that marks the cutoff between expansion and contraction in activity. The overall index, based on sales orders and expectations among buyers of supplies for factories, dropped to 48,4 from 51,1.

The index edged up to 49.5 last month, but still showed the sector under pressure.

Manufacturing accounts for about 15% of the economy's overall output and more than 13% of jobs in the formal sector.

It was the main driver last year of SA's first recession since 1992, and was also the main factor that helped it emerge from recession at the end of the year. Weak domestic demand, along with flagging global demand, have continued to weigh on the sector, along with gains in the rand.

Currency trends

The currency has appreciated by more than 4% against a trade-weighted basket of currencies this year and scaled a five-month peak at R7.19 to the dollar last week.

Appreciation in the currency tends to erode the competitiveness of local exports while making imports less expensive. This hits domestic producers and jobs.

Possible growth

Growth in June would be driven by production of motor vehicles, parts and accessories as well as petroleum products, Investec economist Kgotso Radira said.

"Conditions in some subsectors remain dire, as they are still in recession," he said.

"The PMI's recent deceleration is reflective of the fragility of the recovery and the uncertain outlook for the sector," Radira said.

Standard Bank economist Shireen Darmalingam is a bit more upbeat, predicting growth of 8% in factory output compared with June last year - mainly due to the "base effect" of low output last year. But she expects the momentum to slow in the third quarter of this year.

Employment prospects in the sector are also still bleak, with the PMI survey suggesting that jobs are still being shed, though at a slower pace than early this year.

Source: Business Day