Mariam Isa
2 December 2008
Johannesburg — SA's factories have put in their worst performance in nine years, hammered by the global recession and waning consumer demand and backing the case for an interest rate cut next week.
The Investec purchasing managers' index (PMI) plunged to 39,5 last month from 46,2 in October -- well below forecasts and dipping below 40 for the first time since its inception nine years ago.
Similar surveys in Britain, Europe, China and Russia showed factory output slumping to historic lows. In the US activity contracted at its fastest pace in 26 years.
The dismal PMI readings for SA and its main trade partners were seen as likely to put pressure on the Reserve Bank to cut interest rates at its policy meeting next week to help stimulate the flagging economy.
"There is no argument now to justify unchanged monetary policy in SA, given the extent to which the world has changed," said Razia Khan, Standard Chartered's regional research head for Africa.
"These are not normal times. When you factor in the worst global slowdown seen in decades ... there is less reason for the Bank to keep rates on hold now."
The European Central Bank and Bank of England are expected to slash interest rates this Thursday. PMI readings in Britain and Europe yesterday fell below 40, painting a bleak outlook for factory exports.
The monthly surveys -- which measure sales orders and expectations among purchasers of supplies for factories -- are seen as a reliable health gauge for the sector.
Manufacturing output in SA -- which accounts for 16% of the economy and 14% of formal jobs -- shrank 6,9% in the third quarter of this year, its steepest fall in 17 years.
A breakdown of the PMI paints a grim outlook. Its business expectations component, which has a six-month time horizon, collapsed by 20 index points to 29,9, a historic low.
Business activity and new sales orders also plumbed record lows, falling to 30,6 and 35,8 respectively, on a seasonally adjusted basis. "Given the sharp domestic and global economic slowdown, the manufacturing sector continues to operate under severe pressure," said Mokgatla Madisha, portfolio manager at Investec Asset Management.
The rand weakened 1,6% to R10,30/$ after the PMI was released but this also reflected falling prices for equities and the commodities which are SA's export mainstay.
The Bureau for Economic Research, which conducts the survey, said it did not expect factory output to rebound until the second quarter of next year.
SA's PMI has been below 50, the cutoff point between expansion and contraction, for nine out of 11 months this year.
The employment index for the survey also dipped last month, slipping to 46,4 from 47,1 in both October and September. Madisha said this suggested jobs would "continue to be shed in the manufacturing sector".
SA's jobless rate edged up to 23,2% in the third quarter after hovering at 23,1% for two years. Many of the job cuts have been in manufacturing.
The price component of the PMI dipped to 84,6 last month from 85,7 in October, surprisingly high given that inflation had fallen in September and October.
Citigroup economist Jean-Francois Mercier said this pointed to lingering pressure on producer prices, which might persuade the Bank to keep the repo rate steady at 12% next week.
"The PMI report adds to recent evidence pointing to a marked downturn in manufacturing in particular and the SA economy in general," he said.
"It also bolsters the case for meaningful rate cuts over the next 12 months, though we still see no cut on December 11."
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