Johannesburg - Growth in South Africa’s two key sectors slowed in July, with weak activity renewing fears that the country may struggle to avoid recession and a downgrade to junk status by year’s end.

Data from Statistics SA yesterday showed manufacturing output slowed to below 1 percent year on year in July while mining output contracted, dousing optimism earlier in the week after second-quarter gross domestic product (GDP) bounced back from a contraction of 1.2 percent in the first quarter to 3.3 percent in the second.

Contracted

Manufacturing slowed to 0.4 percent year on year in July, well below expectations of 3 percent, after rising by a revised 4.7 percent in June.

Mining output contracted by 5.4 percent in the month from a 3 percent contraction previously. The expectation was 1.4 percent.

Production of electrical machinery shrank 13.7 percent, basic iron by 4.9 percent and vehicle production by 3.8 percent year on year.

Ratings firms Fitch and S&P Global Ratings, which rate South Africa’s debt one notch above junk status, have cited low growth as a possible trigger for a downgrade in reviews in December.

Kamilla Kaplan, an economist at Investec, said the outcome of manufacturing production was consistent with the Purchasing Managers’ Index (PMI) survey that in July and August signalled a slowdown in momentum.

“Should the extent of weakness registered in the July figures be repeated in the coming months, it can be expected that the sector will make a much smaller contribution to GDP in the subsequent quarters. As such, the annual GDP outcome is still likely to be closer to the 0 percent mark.”

Hanns Spangenberg, an analyst at NKC African Economics, said while the mining sector made a positive contribution to GDP growth in second quarter, the latest numbers provided evidence of lacklustre conditions in the country’s mining sector.

Weak demand

He said the sharp contraction in July exceeded market expectations, with the latest Reuters poll median projecting a 1.4 percent month-on-month contraction.

Weak external demand, along with structural domestic issues, was set to place pressure on the mining industry in the second half, with overall real GDP growth also expected to slow from the rebound seen in second quarter.

Henk Langenhoven, the chief economist at the Steel and Engineering Industries Federation of Southern Africa (Seifsa), said they were gravely concerned at the worsening situation in the metals and engineering sector, with the numbers indicating a persistent slump.

He said the July figures painted a dismal picture of activity on production, which directly affected the sub-industries in the metals and engineering sector.

Langenhoven said July production was 2.1 percent lower than that in the previous month, while year to July 2016 production was 4 percent lower than the previous year. When analysed over a 12-month period, the recent numbers are 5.4 percent lower than last year.

“Seifsa warned on September 6 that the healthier GDP and manufacturing numbers for the second quarter of 2016 were not a reflection of the persistent dire situation in the metals and engineering sector,” Langenhoven said.

He said that notwithstanding the helicopter view of the numbers released this week, a closer look at the metals and engineering sector revealed a grim picture, indicating further risks to jobs and business stability.

* With additional reporting by Reuters

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