Rene Vollgraaff
ROLLING power blackouts in South Africa and the risk of strikes are weighing on manufacturing output, threatening already anaemic economic expansion and clouding the central bank’s task as it seeks to tackle inflation.
A government report today will probably show factory output increased 1 percent in March after two months of contraction, according to the median estimate of 17 economists surveyed by Bloomberg.
The industry shrunk for seven of the last 12 months and the purchasing managers’ index (PMI) signals a decline in April. While investors are pricing in a 25 basis-point rate increase by September, four-month forward-rate agreements have retreated over the past two weeks.
Regular blackouts have limited production just as Africa’s most-industrialised economy seeks to recover from the slowest growth since a recession in 2009. The slow growth from an industry that makes up 13 percent of gross domestic product may test the resolve of policymakers to act to curb inflation, seen accelerating through the top end of the Reserve Bank’s 3 percent to 6 percent target range.
The weak manufacturing industry “makes it very difficult for monetary policy”, Thabi Leoka, an economist at Renaissance BJM Securities, said.
“I’ve already seen some growth forecasts of below 2 percent for this year and it’s quite clear that inflationary pressures are increasing.”
Double wages
The PMI, an indicator of factory activity, fell to the lowest level in 11 months in April, signaling a slide in production. That may put at risk the government’s forecast of economic growth quickening to 2 percent this year from 1.5 percent in 2014.
A five-month work stoppage at platinum producers, followed by a strike at engineering firms cut 1 percentage point off economic growth last year, according to the central bank.
While the biggest unions have yet to table demands before gold-industry wage talks that are due to start next month, National Union of Mineworkers general secretary Frans Baleni said in March that he might ask for a doubling of entry-level basic wages. Gold producers have said any pay increase must be linked to productivity.
“The risk of a mining-sector strike in the middle parts of this year is quite high,” Jeffrey Schultz, an economist at BNP Paribas Cadiz Securities in Johannesburg, said. “Should we see a large strike in the gold sector, that will undoubtedly have a negative impact on manufacturing prospects.”
Price pressures
Yields on government rand bonds due December 2026 fell five basis points to 8.05 percent early yesterday. The rand lost 0.6 percent against the dollar to R11.9879, taking the drop this year to 3.5 percent.
While the central bank left its benchmark repurchase rate unchanged at 5.75 percent since July to help support the economy, rising gasoline, electricity and food costs are putting pressure on prices.
Inflation accelerated to 4 percent in March from a four- year low of 3.9 percent in February and the central bank forecasts it will exceed 6 percent in the first quarter of next year. The five-year breakeven rate, which measures expectations for price growth, last week climbed to the highest in 10 months. – Bloomberg