Contraction worsens in industrial sector

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Wiseman Khuzwayo

THE MANUFACTURING sector remains contractionary, according to the seasonally adjusted Kagiso purchasing managers’ index (PMI), which fell to 45.9 index points last month from 46.6 in June.

A reading below 50 indicates contraction and the index has now been below this threshold for four consecutive months.

Abdul Davids, the head of research at Kagiso Asset Management, said the decline in July was expected, given that the labour strike in the metals and engineering sector lasted almost the whole month.

He said the manufacturing sector’s sub-par performance during the past few months was largely a direct result of the labour strike in platinum mining followed by the work stoppage by metalworkers.

“Given that these issues, for the most part, have been resolved and production should ramp up in coming weeks, the sector should recover during the remainder of the year.”

Kamilla Kaplan, an economist at Investec, said although manufacturing production would stage a rebound as the strike effects dissipated, production would remain restricted by underlying aggregate demand conditions.

“Domestically, household consumption expenditure is slowing. Externally, South Africa’s export demand will be affected by sluggish economic activity in the euro zone and the rebalancing of China’s economy that is envisaged to produce a moderation in growth.”

According to data on Friday, China’s PMI rose to 51.7 in July. It was the strongest since April 2012, beat expectations for 51.4 and was up from 51 in June.

A comparable survey in the euro zone disappointed, however, as factories grew less than expected, with the PMI at 51.8, matching June’s reading and below a flash estimate.

With activity levels remaining low, the Kagiso employment sub-index deteriorated to 43.9 points in July.

The most recent Quarterly Labour Force Survey from Statistics SA indicated that factories continued to haemorrhage jobs during the three months to June, shedding 41 000 jobs during the quarter.

Azar Jammine, the director and chief economist at Econometrix, said despite the July PMI being no worse than expected, two items in the index suggested that more permanent damage had been inflicted on the economy by the National Union of Metalworkers of SA (Numsa) strike.

He said there had been a dramatic decline in the employment component of the index, to its lowest level since 2009. This indicated that the strike would result in a further decimation of jobs at factories.

“In part, this will be due to sharp increases in wages agreed upon by Numsa and the majority of employers. And it will also be attributable to the damage inflicted on overall business confidence in manufacturing, reflected in the significant decline in the ‘expected business conditions’ component”.

“While the index has been weak for a while, conditions worsened in July as the strike forced some producers, including large vehicle manufacturers, to halt production due to supply disruptions,” he said.

Though the new sales order index increased a bit to 45.4, it remained at a dismal level.


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