In October 2011, SA manufacturing production fell by a dramatic 3.6%m/m (seasonally adjusted), compared with an increase of 0.2%m/m in September. The October reading was far below market expectations, which was for a rise of 0.5%m/m; although the consensus forecast was based on a very small sample survey. On an annual basis, production slumped to an annual growth rate of only 1.0%y/y, down from 7.7%y/y in September. Both the monthly as well as the annual rate of change in manufacturing activity has been extremely volatile for considerable period, however, the trend cycle index (see chart attached) clearly shows that SA manufacturing activity is stagnating and under enormous pressure.
The decline in manufacturing activity during October was extremely broad-based, with most of the major sectors declining. In fact, 7 of the 10 major industry groups declined, including:
Motor vehicles -14.4%m/m
Communication equipment -12.4%m/m
Electrical machinery -7.1%m/m
Clothing and textiles -5.4%m/m
Paper and publishing -5.0%m/m
Petroleum and chemicals -3.7%m/m (The fall-off in the petroleum industry mostly relates to scheduled maintenance work)
Food and beverages -1.3%m/m
The industries that experienced positive growth in October include:
Glass and cement 0.5%m/m
Iron and steel 1.1%m/m
Furniture 1.7%m/m
It is also deeply concerning to see that around 30% of all manufacturing activity (by weight) has recorded a decline in output over the past year, and is therefore effectively in a state of recession (the 30% excludes the refinery industry, which has experienced a decline in activity due to scheduled maintenance). This weakness in manufacturing is in sharp contrast with relatively strong growth in retail activity – see chart attached. 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 tells 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 focused 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. Year-to-date, however, production has averaged an annual growth rate of only 2.5%, AND there is a real risk that the growth rate could slip further, with the sector experiencing recession conditions in the coming months.
This is supported by the Kagiso PMI index, which is hovering around the 50 index level, and is hence close to signalling and outright contraction. Further weakness (recession) in the Euro-area (which is extremely likely), coupled with a generally further softening in the world economy, and a general lack of domestic fixed investment activity could be enough to push the SA manufacturing sector into recession.
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. The risks are currently to the downside.
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