In April 2011, SA manufacturing production fell by a shock 3.7% m/m (seasonally adjusted), compared with a rise of 1.6%m/m in March. The April reading was well below market expectations, which was for a decline of 0.6%m/m.
On an annual basis, production slowed to a paltry 0.4%y/y, well down from the very recent peak of 5.8%y/y in February 2011. For 2010 as a whole SA manufacturing activity grew by 4.9%y/y, which was obviously a vast improvement on the 12.9%y/y decline recorded in 2009.
The sharp decline in April was partly due to a significant (and not totally unexpected) fall-off in vehicle production. Output from the vehicle sector declined by a massive 13.2%m/m (seasonally adjusted) in April. Given that the sector has a weight of 10.9% in the manufacturing index, this fall-off contributed 1.4 percentage points to the monthly decline in overall manufacturing activity.
However, while 1.4 percentage points is significant, the weakness in vehicle production explains less than half of the monthly decline in manufacturing activity during April. The rest of the decline is explained by falls in glass, chemicals (including petroleum), clothing, paper, food, beverage, and steel production. This suggest that the fall-off in industrial activity during April was worryingly broad-based.
As we mentioned in our Eco-Minute dated 20 May, although the manufacturing sector recorded impressive growth in Q1 2011 (and contributed handsomely to the better than expected Q1 2011 GDP performance), the overall pace of the recovery remains fragile and somewhat unconvincing. This fragility is reflected in the fact that:
- current level of activity remains more than 10% below the average level of output achieved in 2007/2008;
- capacity utilisation is around 6 percentage points below the 2005 to 2008 level;
- employment levels in manufacturing are still depressed;
- strike activity remains problematic and extremely disruptive;
- manufactured exports remain subdued;
- manufactured imports (especially textiles and clothing), helped by the strong Rand, are eroding the local production base;
- the pace of recovery is extremely uneven/erratic across the major manufacturing industry sub-sectors; and
- most of the key sub-sectors within manufacturing have not embarked on any expansion of production capacity.
Overall, while the improvement in the manufacturing sector since the low in mid-2009 (see chart attached), has generally supported the recovery in SA’s GDP, the sector is still not back at pre-crisis levels of output. At the current trend growth rate, it will take at least another two years to achieve peak output levels.
Crucially, there is still very little fixed investment expansion plans within the manufacturing sector and employment levels are (according to Stats SA) 185 000 below the peak level of employment achieved in early 2008. Hopefully, the various initiatives enacted recently by the Department of Trade and Industry, coupled with continued low interest rates and the ongoing recovery in the broader economy, will support the expansion of the sector. But clearly SA’s manufacturing sector lacks a comprehensive set of initiatives/drivers/incentives that will ensure a sustained and vibrant expansion over the coming years.
The weakness in the April manufacturing data, unfortunately, also points to a loss of GDP growth momentum in Q2 2011 (off a high base), similar to what many other economies are currently experiencing. Hopefully this loss of momentum will prove transitory.
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