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Economic Decline: Surprise decline in output data

Business Report
In the second blow for South Africa’s economy this week, Statistics SA yesterday said that the country’s manufacturing output fell the most since July 2014 after it contracted by 4.1percent year-on-year in April, despite an increase on a monthly basis.

This was worse than the 1.6percent decline economists and analysts had predicted.

According to Stats SA, the reported annual decline in production in April was due to lower production in eight of the ten manufacturing divisions, while positive contributions were only recorded for food & beverages and radio, television and communication sectors.

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The state-of-the art assembly plant at BMW’s plant in Rosslyn. Pictures Jacques Fourie

The largest single contributor to the surprisingly poor result was the sharp contraction of production in the automotive sector, which fell by 17.7percent year-on-year, which cut 1.4percent off of headline growth.

Production in the glass and non-metallic mineral products fell 10.9percent, while electrical machinery shed 16.8percent in the period.

Furniture and “other” manufacturing were down 13.6percent. On a monthly basis, manufacturing production rose 2.3percent, the first increase since November.

According to Trading Economics Industrial Production in South Africa averaged 0.96percent from 1974 until 2017, reaching a record high of 18.5percent in May of 1995 and a record low of -23.20percent in April of 2009 - in the midst of the global financial meltdown.

Remained weak

John Ashbourne, Africa economist at Capital Economics, said that April’s activity data suggested that South Africa’s economy remained weak at the start of the second quarter, but that sales figures expected next week will give a clearer picture of the state of the economy.

“Retail sales figures for April will be released on June 14. Given that consumer-facing sectors were the key cause of the recession in the first quarter.

"This figure will be a crucial sign of whether or not things have improved. Indeed, as the current period of rapid mining growth passes, the economy will be increasingly dependent on the faltering consumer sector,” Ashbourne said.

April’s downbeat manufacturing and mining figures are the second set of data to catch pundits by surprise.

Earlier in the week the country surprisingly fell into a technical recession after the gross domestic product (GDP) contracted by an annualised 0.7percent in the first three months of the year, following a 0.3percent drop in the comparative period.

The manufacturing sector contributes around 12.4percent to GDP.

Elize Kruger, a senior economist at NKC African Economics, said that South Africa’s recent credit rating downgrades to sub-investment grade had increased the risk of further currency depreciation, a higher tax burden and lower investment, which would weigh on overall economic and manufacturing sector growth.

“April’s production figures confirmed that the sector remains under pressure, plagued by weak domestic and global demand for locally manufactured goods, while low confidence levels among households and businesses further strain the sector,” Kruger said.

She, however, said a slight improvement in global economic conditions could be somewhat of a positive offsetting factor.

Last week, the World Bank said global economic growth will strengthen to 2.7percent this year, driven by a pick-up in manufacturing and trade, stabilising commodity prices and rising market confidence. It also expected growth to resume in the commodity-exporting emerging market and developing economies.

Stats SA also said that the mining sector also fell into contraction in April, with production down 1.6percent on a monthly basis after in had picked up significantly in the preceding month.

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