The South African manufacturing sector is likely to decline further in the third quarter as domestic demand remains constrained in a stagnant economy. Photo: Pixabay
JOHANNESBURG - The South African manufacturing sector is likely to decline further in the third quarter as domestic demand remains constrained in a stagnant economy.

Statistics South Africa (StatsSA) said yesterday that manufacturing production had decreased by 2.4percent year on year in September following August's 1.5percent slide.

Investec economist Lara Hodes said this implied that the manufacturing sector should detract from topline economic growth in the third quarter following its 0.3percent addition to the headline outcome in the second quarter.

“September concludes the sector's production figures for the third quarter of 2019 and as such gives us an indication of its potential contribution to third-quarter GDP outcome,” Hodes said.

“A subdued demand environment continues to plague the domestic economy. President Ramaphosa is committed to fiscal consolidation, faster, inclusive growth and the repair of SOE (state-owned enterprise) finances. An acceleration in confidence, investment and economic growth is anticipated on the back of this.”

Dr Michael Ade, the chief economist at the Steel and Engineering Industries Federation of Southern Africa (Seifsa), said the performance of the data was cause for concern when viewed over a longer time frame.

“The overall performance is worrisome, especially given the current state of the economy, underpinned by stagnant domestic demand, nondescript high-frequency data and increasing intermediate input costs, including the prices of raw materials,” Ade said.

“Disconcertingly, limiting ourselves to third quarter, the capacity utilisation data expresses something worrisome about the performance of the metals and engineering sector, reflective of the depressing mood around businesses and the prevailing uncertainty.”

StatsSA said the decline was broad based with all major segments, with nine of the 10 manufacturing divisions reporting negative growth rates over this period.

The only positive contribution had been made by the food and beverages division with 2.9percent, and contributing 0.8 of a percentage point to the reading, thus preventing a larger decrease in the headline number.

The basic iron and steel division, which makes up nearly 19percent of the manufacturing index, sliced a marked 0.9percent off the topline reading followed by the wood and wood products segment and the petroleum, chemical products, rubber and plastic products grouping.

Manufacturing capacity utilisation regressed by 2.2 percentage points between the second quarter and third quarter, from 79.8percent to 77.6percent.

On a quarter on quarter seasonally adjusted annualised basis, which is the measure used to calculate headline gross domestic product (GDP) growth, production was down 3.8percent.

The SA Chamber of Commerce and Industry (Sacci) Business Confidence Index shed 0.7 index points in October to measure 91.7 compared to 92.4 in September. The BCI managed to stay above the 90-index level in October after dipping below the 90-index level in August, and was 4.1 points below last year's October level of 95.8.

Between September and October 2019, five sub-indices improved, six weakened and two remained even.

Particular relative positive monthly contributions came from increased new vehicle sales, lower consumer inflation and real retail sales.

Sacci said business confidence appeared to remain at a plateau while policymakers had little manoeuvring space to set the economy on course.

“Credit rating agencies, lenders and investors are reluctant to make decisions in an uncertain environment. The need for economic growth and reducing unemployment must take centre stage,” it said.