In June 2010, SA manufacturing production rose by an impressive 0.7% m/m (seasonally adjusted), compared with a revised increase of 0.5%m/m in May 2010. The June 2010 reading was well ahead of market expectations, which was for a decline of 0.6%m/m. The outcome for June 2010 is encouraging but also surprising, considering the recent softening in the Kagiso PMI index to below 50 and a general concern that the World Cup would be very disruptive for industry. Overall, the industry appears to have managed the World Cup ‘disruption’ fairly well.
On an annual basis, production is up a very healthy 8.8%y/y, which is above the previous peak annual growth rate of 8.6%y/y in April 2010. Production has improved significantly relative to the decline of 15.3%y/y recorded in August 2009 or the decline of 21.7%y/y in April 2009 (see chart attached).
Although manufacturing activity is out of recession, stability/improvement remains a little fragile. This fragility is due to the ending of key infrastructure projects, the relative strength of the Rand (which makes manufactured imports far more price competitive), and ongoing economic difficulties in the Euro-area (which makes it more difficult to grow manufactured exports). The fragility is also reflected in the fact that the Kagiso PMI index has been trending lower and is currently below the key 50 index level. Although there is currently an anomaly between the actual manufacturing data (as recorded by Stats SA) and the manufacturing PMI reading (as recorded by the BER), we do expect manufacturing to soften in the second half of 2010 given the sluggish world economy, strong Rand, and lull in domestic investment spending (both public and private).
During the three month period from April 2010 to June 2010, manufacturing activity rose by 0.8%q/q (seasonally adjusted, but not annualised). The manufacturing data points to a strong GDP estimate for Q2 2010; certainly relative to some analyst’s current forecast of the contribution of manufacturing activity to GDP. The latest production data, together with the recent concerns about the wheat price, will also tend to dampen expectations of an interest rate cut in September 2010.
Capacity utilisation rose to a more encouraging 80.4% in Q2 2010, from 78.5% in Q1 2010. This is the highest level of capacity utilisation since the final quarter of 2008, but it is not yet at a level that would typically result in increased investment spending.
Overall, manufacturing activity has held up remarkably well in the first 6 months of 2010, certainly much better than most people anticipated just a few months ago. We still expect activity levels to soften somewhat in the second half of 2010, hurt by the relatively strong Rand as well as the lack of new investment initiatives within the private sector. Importantly, though, we do not expect the manufacturing sector to return to a state of recession.
Download the presentation slides