Manufacturing to boost Q1 GDP

A resurgent seasonally adjusted Kagiso Purchasing Managers' Index (PMI) in February could mean a revising of forecasts upwards in coming months as manufacturing production finally caught up with strong consumer demand.

The SA PMI jumped to 57.9 in February from 53.2 in January and 49.4 in December, where a reading below 50 indicates that the manufacturing sector is contracting. Prior to July, the index was above 50 for eight consecutive months.

The output index surged to 65.2 in February and was the highest amongst the 26 countries that make up the global PMI. This compared with 53.6 in January and 49.7 in December and only 38.3 in July.

The new orders index soared to 64.8 in February from 57.3 in January and 48.3 in December.

The buoyant conditions in the manufacturing and construction industries were also reflected in the RMB/BER Business Confidence Index (BCI), which jumped by 14 points to a level of 52 in the first quarter of 2012. This was the first time in over a year that a slight majority of respondents were happy with prevailing conditions in the economy.

The business mood improved in all five of the sectors surveyed during the quarter.

Investec said the February manufacturing increase was to be expected as the PMI rose in the first three months of this year above 50, indicating manufacturing activity was expanding, not contracting.

"While the global economy remains weak and SA's exports are suffering, strong domestic demand is fuelling growth in SA's manufacturing activity.

Indeed domestic demand is running at a robust 5.0% year on year (y/y), and this is likely to persist this year, keeping manufacturing production expanding at a similar pace," Investec said.

Absa Capital said the February increase was driven through a relatively broad-based pick-up in production across categories with nine of the ten production sub-components tracked by Statistics SA ticking up on a month on month (m/m) basis.

"Although we maintain our view that the high base created by the robust performance of the manufacturing sector in the first quarter 2011 will translate into relatively limited y/y growth gains for the upcoming March print, we note the improvement in momentum growth in this series.

This, together with the fact that nearly all key sub-components of the PMI remain comfortably above their neutral level of 50 and have generally outperformed our emerging market peers in recent months, along with the improvement in manufacturing business confidence, suggest that this sector has gotten off to a relatively solid start in 2012," Absa said.

Stanlib economist Kevin Lings said it was more useful to look at the trend cycle index for manufacturing, which clearly showed that although SA manufacturing improved relative to the 2008/2009 severe recession, it had not fully recovered and activity levels remained well below the previous peak.

"There has been a clear improvement in activity levels during the past few months. Hopefully, this improvement is supported by an ongoing expansion of SA business activity into southern Africa, increased infrastructural investment activity and a steady improvement in world economic conditions," he said.