South Africa’s manufacturing sector continues to show signs of recovery. Statistics SA reported yesterday that output surged 5.4 percent in July compared with a year earlier.
The figure is well ahead of the 1.6 percent estimate of 12 economists surveyed by Bloomberg and follows year-on-year growth in volumes of a revised 0.5 percent in June and 2.1 percent in May.
Month-on-month output rose 5 percent in July, after contracting 3.2 percent in June and 1.9 percent in May. Figures are adjusted for seasonal factors.
Razia Khan, the head of Africa research at Standard Chartered, said the “surprisingly strong July manufacturing output print” was in line with the Kagiso purchasing managers’ index (PMI), which rose 4.3 points to 56.5 last month, compared with a consensus forecast of 51.5.
A level above 50 implies an expansion in the sector.
Lisette IJssel de Schepper, an economist at the Bureau for Economic Research at Stellenbosch University, noted that the rise was unexpected because it was off a relatively high base. Growth in July last year was 7.1 percent year on year.
A rise in exports could have boosted output in July this year. Stats SA reported that a strong contribution came from basic iron and steel, non-ferrous metal products, metal products and machinery.
The SA Revenue Service recorded exports of base metals and products rose 10 percent that month.
But supply problems are looming in key industries. IJssel de Schepper warned: “Production will likely be depressed in August and September by the stoppages in the automotive manufacturing sector.”
Strikes started last month when the National Union of Metalworkers of SA demanded a 20 percent wage increase.
The issues have not been fully resolved.
Investec group chief economist Annabel Bishop was more upbeat. She said: “The improvement in the US, the world’s largest economy, is stimulating production globally, with manufacturing PMI readings rising in Europe, the UK and Japan.”
She predicted the improvements would accelerate demand for South African exports, “feeding through to higher domestic income levels and improved employment prospects by next year, if not by the fourth quarter”.
Khan was also positive on the outlook for the sector, given the recovery in South Africa’s key trading partners “and some benefit from the weaker rand”. The currency has traded mostly above R10 to the dollar since the middle of last month from about R9.80 in July and R8.50 at the start of the year.
The manufacturing sector has been suffering from slow growth in its export markets, which has cut sales abroad. But recent data show a turnaround. Economic activity in the US manufacturing sector expanded in August for the third consecutive month and the overall economy grew for the 51st consecutive month, according to the latest Manufacturing ISM Report On Business .
Barclays Research noted: “Higher-than-expected industrial production growth in China in August leads us to fine-tune our [Chinese] growth forecasts to 7.6 percent year on year in the third quarter from 7.4 percent previously.”
And Bloomberg reported that unemployment fell in the UK in the three months to July.
Economists do not expect the latest manufacturing figure to bring a rate hike when the Reserve Bank’s monetary policy committee meets next week. Most expect the repo rate to stay at 5 percent until next year.
Bishop said: “While another interest rate cut is needed, it is unlikely to materialise this year as concerns remain that cutting interest rates could cause portfolio outflows.”