6 July 2009
Johannesburg — FIGURES due out this week should show that factory output shrank at a slower pace in May, suggesting that the worst may be over for the economy's second-biggest sector.
A record 22% contraction in manufacturing production in the first quarter of this year was the main reason why overall output in the economy dived by 6,4% -- its steepest fall in 25 years.
Consensus forecasts from Bloomberg suggest factory output fell by 17,7% in the year to May, which is still bad news for the embattled sector, hit by both waning global and domestic demand. The figures, due from Statistics SA on Wednesday, are set to grab the limelight in local markets this week.
"We're expecting another weak number," said Nedbank economist Carmen Altenkirch. She sees output falling by 19,8% year on year, in part reflecting the downtrend in Europe, SA's main trade partner. "We could still see another month or two of very weak annual figures," she added.
SA's purchasing managers index (PMI), a reliable health gauge for the sector, crept higher in both May and June, but is still far below the key 50 level, which marks the point between a fall and a rise in factory activity.
Many economists do not forecast the manufacturing figures, but there is general agreement that the number of public holidays in April will make the May figure look better.
A growing number of analysts think that the brunt of the recession in SA may be past -- even though an overall contraction of between 1,5% and 2% this year looks inevitable.
Mining figures for the same month are due on Wednesday. Output is again likely to have fallen less sharply, after diving more than 10% in the year to April. The sector accounts for just 5% of economic output, but is labour-intensive.
Official data show that mining shed 18 000 jobs in the first quarter of this year while manufacturing lost 29 000. Overall, the formal sector of the economy saw 179 000 job losses, which alarmed many as employment tends to lag trends in the economy.
A business confidence survey from the South African Chamber of Commerce and Industry today will probably not show much of a pickup, particularly as the Reserve Bank left interest rates on hold last month.
The Bank cited stubborn inflation as the reason behind its unexpected decision to keep its repo rate steady at 7,5%, after reducing it by a cumulative 4,5 percentage points since December. Markets had priced in a cut of half a percentage point.
Inflation expectations also played a role in the decision, which angered labour unions and disappointed business. Finance Minister Pravin Gordhan said on Friday that SA's policy of targeting inflation would stay in place, despite growing calls to reassess or scrap the framework.
"Inflation targeting provides a clear nominal anchor for monetary policy and requires the Reserve Bank to be transparent about its goals and actions," he said in a written reply to a question in parliament.
"Since inflation targeting was adopted in 2000, both the level and volatility of inflation has declined, while... growth has also been stronger and less volatile than under previous monetary policy regimes."
Inflation has breached its official 3% to 6% target since April 2007.
Figures from the Bank tomorrow will show whether it stepped up the pace of its purchases of foreign exchange last month. Analysts expect more aggressive buying because of the rand's rally, which briefly drove it to a 10-month peak at R7,67/dollar. The currency has since pulled back to about R7,90/dollar, but at these levels is seen as limiting for any rebound in factory output when global and domestic demand revives.
In May, gold and foreign currency reserves leaped by 5,1%, mainly due to proceeds from SA's $1,5bn foreign bond issue.
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