Johannesburg — Figures due out this week should show that factory output picked up in August, in line with growing evidence that the economy's most embattled sector is emerging from the recession.

Consensus forecasts predict that manufacturing production rose 1,3% compared with July, while the decline versus the same month last year eased to 11,3% from 13,7% in the previous month.

A key survey last week pointed to the second-biggest rise in activity in the sector in 10 years last month, backing speculation that SA's factories are about to join a global manufacturing rebound.

But some analysts said that even if the data due on Thursday lived up to expectations, long-term prospects for the economy's second- biggest sector remained unclear.

"The manufacturing sector is showing encouraging prospects for improvement over the next several months," Standard Bank said in a research note.

"However, we remain cautious over the ability of the sector to improve substantially owing to smaller prominence of consumer goods producing sectors."

Standard Bank believes that SA's factories, which account for 14% of the economy's output, will remain under pressure from low export earnings in the face of rand strength, as well as high labour costs and excess global capacity.

Most of SA's exports are based on mineral resources, and these were not enough on their own to generate an export-led boom. The outlook for resource-based exports was not promising when viewed against poor global investment prospects over the next few years, the bank said.

Factory output rose 3,3% in July, the biggest monthly rise since April last year. Citigroup economist Jean- Francois Mercier sees a more modest increase of 0,5% in August.

"A mild setback in electricity consumption in August backs our argument," he said. Last month SA's purchasing managers' index, a reliable health gauge for the sector, shot up to its highest level since May last year, nearing the key 50 level marking the dividing line between shrinking and expanding output.

A recovery in manufacturing is crucial to SA's economy as it was the main factor driving the country into its first recession in 17 years.

There has been much debate about the toll the strong rand is taking on exports, particularly from the manufacturing sector.

The unit is well off a peak of R7,29/ scaled a couple of weeks ago, but has clawed back much of the losses sparked by the collapse of the proposed merger between MTN and India's Bharti. It was trading at R7,62/ late on Friday, after dipping to a one-month low at R7,78/.

Data on SA's reserves last month will be eyed closely on Wednesday for proof whether the Reserve Bank has stepped up its purchases of foreign exchange , as its governor, Tito Mboweni, maintained last week.

Markets see gross reserves up at nearly 39bn last month from 37,95bn at the end of August, when they were boosted by a 2,17bn shot in the arm from the International Monetary Fund. Mboweni said the Bank had been "creaming off more dollars in the market" which had given reserves another significant boost.

But analysts are a bit sceptical. "The risk is that the governor may have engaged in a rhetorical exercise to talk the rand weaker," said ETM economist Russell Lamberti. "In the past his actions have not always matched his words."

Lamberti thinks the Bank may have bought another 300m- 500m of foreign exchange reserves, in line with forecasts from other economists. Unless the build- up is significantly more or less than expected, there is unlikely to be any reaction from the rand.