In November 2011, SA manufacturing production rose by a more encouraging 2.9%m/m (seasonally adjusted), compared with a revised decrease of 3.5%m/m in October. The November reading was well above market expectations, which was for a rise of 2.2%m/m; although the consensus forecast was based on a very small sample survey.
On an annual basis, production improved to a growth rate of 2.6%y/y, up from a revised 1.2%y/y in October. In the past three months (September 2011 to November 2011), production has risen by 2.0%q/q, seasonally adjusted.
Unfortunately, both the monthly as well as the annual rate of change in manufacturing activity has been extremely volatile for a considerable period, with a substantial divergence in performance at sector or industry level. For example, cement production was up 14.4%y/y in November 2011, while total vehicle production was down 12.6%y/y in the same month (see chart attached). There has also been increased maintenance in the petroleum industry, which has distorted the data, and exaggerated the weakness.
It is perhaps useful to look at the trend cycle index for manufacturing (see chart attached), which clearly shows that although SA manufacturing has recovered from the 2008/2009 severe recession, it has been stagnating for the past year and remains under pressure. The performance of manufacturing has certainly not kept pace with the performance of the retail sector (see discussion below and chart attached). Instead it has been negatively impacted by a range of factors including higher import demand (helped by the strong currency), a relatively poor performance in the domestic mining and agricultural sectors, a slump in construction activity as well as a general lack of fixed investment spending.
It is concerning to see that around 30% of all manufacturing activity (by weight) has recorded a decline in output over the past year. This weakness in manufacturing is in sharp contrast with the relatively strong growth in retail activity. This is one reason why analysts keep suggesting that the economy is sending mixed signals.
Unfortunately, the demand at the retail level is increasingly being satisfied by imports. Hence South Africa’s import intensity has continued to rise. It also tell us that stimulating the consumer further (rate cut) could have very little impact on local manufacturing, but rather just lead to increased imports. Instead, SA needs a broader policy response that focuses on an increase in fixed investment activity, especially business related infrastructure.
For 2010 as a whole SA manufacturing activity grew by 4.8%y/y, which was obviously a vast improvement on the 13.4%y/y decline recorded in 2009. 2011-Year-to-date, however, production has averaged an annual growth rate of only 2.5%. While we still don’t expect the manufacturing sector to return to severe recession conditions, it will struggle to gain any real momentum without an improvement in the global economy and/or a revitalisation of the domestic economy in the form of increased investment activity and employment growth.
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