Manufacturing, mining production forecast remains weak

This‚ together with rising inflationary pressures emanating from the weak rand and high fuel prices‚ will probably persuade the South African Reserve Bank's Monetary Policy Committee (MPC) to keep interest rates unchanged well into 2014‚ Nedbank's economic unit predicts.

Data released by Statistics South Africa last week showed that annual growth in manufacturing production slowed to 0.4 % in June‚ from a downwardly revised 2.1 % in May (2.2 % previously) and compared with market expectations of 3.8 %.

The annual growth rate was mainly driven by the 'basic iron and steel‚ non-ferrous metal products‚ metal products and machinery' sub-index which rose 6.4 % year-on-year (y/y) and contributed 1.3 percentage points. The 'petroleum‚ chemical products‚ rubber and plastic products' division‚ with a decline of 3.9 % y/y (adding -1.0. of a percentage point) was a significant negative contributor.

On a seasonally adjusted basis manufacturing production rose by 3.1 % quarter-on-quarter in the second three-month period. The biggest contributors to the quarterly rise came from the 'basic iron and steel‚ non-ferrous metal products‚ metal products and machinery' division (adding 1.8 percentage points) as well as the 'motor vehicles‚ parts and accessories and other transport equipment' division which contributed 0.9 percentage points.

Mining production

Mining production suffered a steeper-than-expected decline in June‚ dropping by 6.2% y/y‚ against a consensus estimate of 0.5% y/y. The decline was led by renewed weakness in platinum group metals (PGM) and gold. The 18.9% y/y drop in PGM output contributed -4.2 percentage points to the total decline‚ with gold contributing 2.3 percentage points. Negative growth was also observed in other metallic minerals (-38.0% y/y) and diamonds (-22.9%) y/y.

Nedbank's economic unit noted that global purchasing managers indices (PMI) showed some signs of improvement in July and that the South African PMI has been above the 50 point mark for four consecutive months now. The July PMI number came in at 52.2 from 51.6 in June. However, it points out that despite these improvements‚ the manufacturing sector cannot be considered out of the woods yet as the sector will continue to face subdued demand.

"In the large export-orientated industries‚ output growth will be contained by recession in the Eurozone‚ a more measured Chinese economy and weaker international commodity prices. At the same time‚ cost pressures will remain elevated‚ with high electricity costs‚ rising unit labour costs and expensive transport and logistics. In the inwardly-focused industries‚ demand conditions will also be broadly softer‚" Nedbank says.

Says Standard Bank economist Nomvuyo Guma: "The latest manufacturing data confirms our view that the underlying momentum in the manufacturing sector is extremely weak - something seemingly at odds with recent PMI readings. The PMI has remained above the key 50-point level for most of this year despite the still-challenging conditions faced by manufacturers.

Challenges remain

"In our view‚ the cautiously optimistic sentiment expressed in the PMI has not been supported by accompanying real output data and could well retreat in the months ahead as expectations of future business conditions begin to wilt. The latest labour data confirms the unsatisfactory state of conditions in the sector‚ with 18‚000 jobs lost in the first quarter of this year.

"The challenges facing the manufacturing sector continue to mount: from the alarming plunge in mining output; rising input costs (the PMI Prices index rose to a 2.5-year high in July) and downward revisions in respect of prospects for global growth this year. We remain bearish on prospects for the sector and reiterate our view that the factors for a sustainable turnaround in the manufacturing sector remain elusive," Guma said.

Adds Investec economist Kamilla Kaplan: "Of the ten main sub-sectors‚ six registered a contraction in growth in June which highlights the fact that the broader economic climate remains challenging. GDP growth forecasts have been revised lower and currently GDP is functioning well below its potential. At the same time risks to growth remain a feature. Economic growth is expected to remain subdued while inflation will return to the target range in the fourth quarter of this year. We anticipate that the SARB will maintain a low interest rate environment until the end of next year."