Johannesburg — FACTORY output rose a hefty 3,1% in September, more strongly than expected and backing the view that the most embattled sector is starting to recover.

The manufacturing figure was 11,4% down on last September's, easing more than expected from a revised 15,2% contraction in August, official data showed yesterday.

This signalled that SA's second-biggest sector notched up some growth in the third quarter, which may have lifted the economy out of recession.

The September quarter's manufacturing output was 2,6% higher than the previous quarter's, with three out of 10 sectors curbing output, Statistics SA said. Standard Bank economist Danelee van Dyk said: "Economic activity is generally improving."

After news that electricity consumption rose 2,6% in the third quarter, "the writing was on the wall -- the economy has steered out of recession", Van Dyk said.

Manufacturing is the economy's second-biggest sector after financial services, and was hit hardest by the global downturn, shrinking a record 22% in the first quarter this year.

Although SA lags global recovery in the sector by several months, industry surveys suggest the domestic recovery will carry on for the next three to six months. The rise in output in September was broad-based, and included industries such as food, motor vehicles, chemicals, iron, steel and electrical machinery.

"Most of these sectors were particularly hard hit during the recession," Stanlib economist Kevin Lings said.

Manufacturing had the highest number of job losses in the third quarter, shedding about 150000 jobs, a plunge of more than 8%.

But employment is a lagging indicator, and SA's purchasing manager s' index is nearly back at the neutral 50 level, which marks the cutoff between expanding and contracting activity. It rose to a 16-month high of 47,6 last month after leaping 6,4 points to 45,9 in September.

"Employment prospects in the sector could be on the rise," said Absa Capital economist Jeffrey Schultz. "We remain relatively sanguine about SA's economic outlook." Most analysts expect the economy to contract about 2% this year, then expand at the same pace next year.

A five-percentage-point cut in lending rates since December is still making itself felt slowly.

The improved manufacturing data support the case for the Reserve Bank to keep the repo rate steady at 7% when its monetary policy committee meets next week.

But Thebe Securities analyst Monale Ratsoma points out that there is an "element of wariness" in markets after Gill Marcus replaced Tito Mboweni as governor of the Bank this week. "That said, we are in line with the consensus view that further cuts in this cycle are unlikely, given the uncertain inflation outlook and improving real activity."

Marcus was appointed as the trade union allies of the African National Congress campaigned for the departure of Mboweni, angered at his reluctance to cut interest rates further.

Van Dyk expected manufacturing to contract 14,5% over this year, then expand 3,5% next year. Rand strength, high electricity prices and weak household demand would limit the sector's advance next year.