Economy / 4 December 2018, 4:10pm / Staff Reporter
JOHANNESBURG – The Steel and Engineering Industries Federation of Southern Africa (Seifsa) welcomes South Africa’s official exit from a technical recession in the third quarter of 2018, and urges businesses to capitalise on improving local demand in order to expand.
South Africa’s real gross domestic product (GDP) increased by 2.2 percent in the third quarter of 2018, following a revised seasonally-adjusted 0.4 percent quarter on quarter decrease recorded in quarter two of 2018. The broader manufacturing sector’s performance was equally encouraging, with the sector significantly contributing to growth in GDP in the third quarter.
Speaking after today’s release of GDP numbers, Seifsa chief economist Michael Ade said the biggest concern often raised by stakeholders in the broader manufacturing sector as a stumbling block to expansion, profit and job creation is that of stagnant or poor demand.
Ade said although other documented constraints still prevail, the overriding challenge is that of lack of demand, with poor local demand often cited by businesses as the main reason for their increasingly turning to regional African and global markets for sales, despite the additional logistic costs involved.
Platform for local businesses
“The improvement in GDP growth is, therefore, encouraging as it provides a platform for local businesses to be inward looking, against the backdrop of an improved demand for their intermediate and finished products,” Ade said.
However, he warned that although South Africa has officially exited the recession, challenges still prevail. Although the improvement in growth signals a step in the right direction, the economy and businesses are still under duress characterised by high intermediate and operational costs, poor ratings from Fitch and S&P (which still rate South Africa’s debt at sub-investment grade or junk status), vulnerability to investor sentiments and poor business and consumer confidence.
He said much work still needs to be done to revive a stuttering South African economy and support industrial growth and expansion. For this to happen, Dr Ade said urgent intervention is needed to prevent the recent electricity blackouts from spiraling out of control as the ripple effect from load shedding will inevitably place businesses under duress, discourage investment and impact negatively on company output and economic growth. Accordingly, the Government needs to continue with identified reforms in beleaguered State-owned enterprises (SOEs), while also containing high debt levels.
“The SOEs and municipalities, through their designation for localisation imperatives, are important parts of a kaleidoscope of end-users which are very key to the survival of the manufacturing sector, including its diverse metals and engineering cluster of industries. Therefore, the SOEs and municipalities need to be in good shape in order to continuously sustain positive GDP growth projections and demand levels and boost expansion in industrial production,” Dr Ade said.
He added that the support of these institutions is important for continuous improvement in manufacturing, especially considering that manufacturing is among the sectors which contributed positively to the lift in third-quarter GDP growth momentum.
Dr Ade said although the manufacturing sector seems to be slowly regaining its influence, underpinned by repeated recording of positive monthly output figures since April 2018, it still needs more support.
Going into the new year, Dr Ade said some signs of green shoots which are necessary to kickstart the economy are evident for businesses to capitalise on and move to the next level of growth. He observed that the weak rand-to-dollar exchange rate which presented the biggest challenge to businesses in the manufacturing sector has strengthened, fuel prices have temporarily slowed (with a possible breather on logistic costs), and the PMI rebounded to 49,5 index points in November, representing the first increase after three consecutive months of declines and the best performance since July 2018.
“Above all, domestic demand – which is the most important and sustainable driver of growth for the manufacturing sector, irrespective of Government incentives or protectionism – has improved and stakeholders are very hopeful,” he said.
In conclusion, Dr Ade said SEIFSA is also hopeful about constant improvement in GDP growth, but re-iterates the need for more swiftness in policy implementation and consistency in monitoring and evaluation of relevant interventions in order to maintain the positive growth trajectory.