Mariam Isa
2 September 2008
Johannesburg — MANUFACTURING activity in SA rebounded from a record low last month, but there is still ample evidence that output from the economy's second-biggest sector is contracting, a key survey showed yesterday.
SA's purchasing managers index (PMI) rose to 47 from 42,8 in July - in line with an improving global trend as falling oil prices provided some relief for steep prices for factory inputs.
But Investec Asset Management, which sponsors the survey, warned that manufacturing output might still contract in the third quarter of this year.
"While domestic demand is waning and foreign demand is likely to moderate, the outlook for the sector remains under pressure," said Investec Asset Management's fixed income head, Andre Roux.
He told Business Day in an interview that for the next few months the seasonally adjusted index was likely to remain below 50 - which points to falling manufacturing production.
"The bounce suggests there is no longer an accelerating fall in the sectorn but I can't see it recovering yet either. It is still consistent with a quarterly decline in manufacturing," he said.
If SA's manufacturing output remains weak it would help curb growth to nearly 3% this year from about 5% in each of the past four years.
Official figures show that the sector, which accounts for about 16% of gross domestic product (GDP), rebounded by 14,5% in the second quarter of this year.
Analysts attributed the strength of the recovery partly to the comparison with a fall in the first quarter of this year, stemming from power outages.
"It is too early to tell if the recovery in August will gather momentum or whether it was a technical improvement from extremely depressed levels," said Goldman Sachs economist Ashok Bundia.
The monthly PMI survey measures sales orders and expectations among purchasers of supplies for factories, and has been widely seen as a reliable health gauge for the sector.
Compiled by the Bureau for Economic Research in Stellenbosch, it has registered readings below 50 for six out of eight months so far this year.
But two of its components, business activity and new sales orders, both improved last month. Business activity rose to 44,4 from 39,7 in July while new sales orders surged to 44 from 37,9 - also a record low.
Expectations for business conditions in six months' time rose to 53,8 from 50 in July, as sentiment improved. Roux said the rand's relative stability at weaker levels played a role.
So did a sharp fall in global oil prices, which retreated from record highs at $147 a barrel in July to $114 at the end of last month. That helped curb the price index of the PMI, which fell to 87,5 from 91,8 - the first time it was below 90 for five months.
But employment conditions in the manufacturing sector were still under heavy pressure, with the index of the PMI edging up to just 43,6 from 42,4.
This tallied with official data last week, which showed that 20000 manufacturing jobs were shed in the second quarter of this year.
That is worrying as the sector provides about 14% of formal jobs.
But a strong rise in inventories suggested the pickup in the PMI index may be sustained. That component climbed to 53,8 from 46,2, while purchasing commitments also rose to 51,6 from 46,6.
"The manufacturing sector has rebounded but is still vulnerable," said Brait economist Colen Garrow.
"Domestic consumption is on the back foot and the global economy has cooled off tremendously."
Consumer spending, SA's main engine of economic growth, has slowed sharply this year in response to rising interest rates.
The PMI for Europe, SA's main trade partner, yesterday showed that manufacturing activity contracted for the third month in a row. China's PMI was steady at 48,4 after falling below 50 for the first time since its launch in 2005.
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I agree wih Investec.