SA Manufacturing Production

In April 2010, SA manufacturing production fell by 1.0% m/m (seasonally adjusted), compared with a revised increase of 3.0%m/m in March. The April reading was in-line with market expectations, although the previous month’s data was revised higher. The expectation for a decline was consistent with the recent softening in the Kagiso PMI index, which fell further in May 2010.

On an annual basis, production is still up a very healthy 8.7%y/y; despite the monthly decline. Production has improved significantly relative to the decline of -15.3%y/y recorded in August 2009 and the -21.7%y/y in April 2009. Manufacturing activity is out of recession, but the stability/improvement remains a little fragile, especially in Q2 2010 due to four key factors:

• First, it is entirely possible that the inventory adjustment is mostly completed (which boosted production in late 2009 and early 2010, after destroying production in late 2008 and early 2009), and that a sustained rise in production is now much more closely related to a sustained rise in final demand
• Second, the increased labour unrest, especially in May with the Transnet strike, would have hurt some areas of production
• Third, the ending of key infrastructure projects related to the World Cup most likely resulted in less output from local industry
• Fourth, increased factory downtime associated with the viewing of key World Cup games may reduce total work-hours in June

During the three month period from February 2010 to April 2010, manufacturing activity rose by a modest 0.8%q/q (seasonally adjusted, but not annualised). In this three-month period, only 6 out of the 10 major manufacturing sectors increased output; led by chemicals, paper and motor vehicle production. The quarterly growth rate is likely to soften further over the next two to three months (see above discussion).

Capacity utilisation fell to 78.4% in Q1 2010, from 80.0% in Q4 2009. This fall-off in utilisation is actually not all that surprising, and could soften further in Q2 2010.

Overall, given the recent softening/fall-off in the Kagiso PMI index, as well as the specific impact of recent strikes as well as anomalies linked to the start of the World Cup, we expect manufacturing activity levels to soften further over the next few months. Beyond that, it is vital that there is a more robust and sustained increase in domestic final demand/fixed investment spending to provide the basis for a sustained and more significant expansion of manufacturing output.