Mariam Isa
10 July 2009
Johannesburg — FACTORY output dived 17,1% in the year to May, while mining output plunged 14,5%, official data showed yesterday, suggesting there is little relief in sight for the economy's two most embattled sectors.
Uncertainty over prospects for a recovery in global trade and a huge local electricity tariff hike will weigh on both sectors in the near term, tarnishing SA's growth outlook.
Manufacturing plunged by a record 22,1% in the first quarter of this year, making it the main culprit behind a 6,4% contraction in the economy -- its steepest fall in a quarter of a century.
"The overall pace of contraction appears to be less negative, but we are still a long way away from manufacturing making a meaningful contribution to overall growth," said Standard Chartered's research head for Africa, Razia Khan.
Mining also shrank by a record 33% in the first quarter of the year. Yesterday's data showed that the sector contracted 10,5% in the first five months of this year, which was viewed with some alarm.
"These are really horrible numbers. In terms of the overall industry it's almost unprecedented," said Roger Baxter, chief economist at the Chamber of Mines. "We expect conditions to remain very challenging in the short term."
The extent of the fall in mining output was the worst since early last year, when power outages forced the sector to shut down for several days.
Factory and mining output combined account for a fifth of SA's economy, which has slid into its first recession in 17 years.
Manufacturing on its own comprises 15%, with mining making up 5%, according to Statistics SA.
But in terms of its importance for the economy, mining punches well above its weight.
Mineral products account for about half of SA's exports, while mining companies account for more than a third of the capital of the JSE. The sector also provides more than half a million jobs.
That means mining is crucial to the health of SA's economy, which needs large foreign capital inflows to finance investment. But it has been in decline since 2006, due to infrastructure constraints, power shortages, and volatility in the rand.
The local currency's rally of more than 16% against both the dollar and the euro this year does not bode well for either mining or manufacturing as it makes local exports less competitive.
A 31% jump in electricity tariffs, effective from this month, will also be a challenge as it will boost operating costs in both sectors.
"The underlying trend in manufacturing production will remain weak as economic conditions, both locally and globally, stay depressed," said Nedbank economist Johannes Khosa. Production in sectors which supplied the local market might even moderate further, he said. That was because consumers were likely to "remain cautious" as unemployment climbed, disposable income fell, and debt levels stayed high.
Manufacturing sectors, which rely on investment, were also likely to "experience further weakness" as private sector investment fell this year and next, Khosa said.
In the first five months of this year, factory output has fallen 15,7% compared with a rise of 3,1% during the same period last year.
During May itself, production rose 0,5%, seasonally adjusted.
It was the first monthly rise for the sector in almost a year, but the improvement was driven by the large number of public holidays in April, which curbed output.
Stanlib economist Kevin Lings said that manufacturing output in SA was still down at levels that last prevailed in 2004.
"In the past three months, none of the 10 major sectors within the manufacturing industry made a positive contribution to output." There was a particularly large decline in three areas -- chemicals, paper and printing, and iron and steel -- which together accounted for more than half of factory output, he said.
But Lings is hopeful that two months in a row of improvements in SA's purchasing managers' index (PMI), a key health gauge for the sector, will feed into factory output.
"The PMI index appears to have found a bottom turning point ... in addition, global PMI readings have started to improve," he said.
PMI surveys measure sales orders and expectations among buyers of factory supplies. In SA, the overall PMI index has been below 50 -- the cut-off point between contraction and expansion -- for more than a year.
But it has edged up from a record low of 35,6 in April, rising to 37,3 in May and 37,9 last month, its sponsors Kagiso Securities have said.
Another positive sign is that the business expectations component of the PMI has risen further above 50 for two months in a row. Similar surveys in Europe and the US also show an easing in the pace of contraction in factory output.
Absa Capital said yesterday that SA's manufacturing sector was by no means "out of the woods" with all 10 sectors contracting in May, compared with the same month last year.
"We believe it is going to be a long time before the manufacturing sector will be able to enjoy positive year-on- year growth rates," it said in a research note. Along with "significant pressure" on other sectors of the economy, notably mining and retail sales, this meant that gross domestic product (GDP) would suffer this year.
Absa expects GDP to shrink 2%- 3% in the second quarter of this year, and by 2% over the whole year.
Nedbank has a similar forecast. Yesterday's data offered "some hope" the trough in the cycle was behind manufacturing, Khosa said. "We expect recessionary conditions will prevail well into the third quarter ... and that real GDP will contract by around 2% in 2009 as a whole."
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