SA manufacturing better than expected in June 2016

In June 2016, SA manufacturing production rose by an encouraging 0.7%m/m, after increasing by a revised 1.3% in May 2016 (monthly data is seasonally adjusted). On an annual basis, manufacturing increased by 4.5%y/y in June 2016, which is the highest annual rate of growth since July 2015. Overall, the level of production (seasonally adjusted) is now at its highest level since September 2008. During the first six months of 2016 South Africa’s manufacturing sector has achieved an annual growth rate of 1.6%y/y.

The increase in production during June 2016 included sharp increases in basic chemicals, iron and steel, leather products and paper and publishing. These increases were partially offset by a noticeable decline in vehicle production as well as beverages. Crucially, during the three months from April 2016 to June 2016 (Q2 2016), SA manufacturing rose by 2.0%q/q. Eight of the ten manufacturing divisions reported positive growth rates over this period with the largest contributions to the 2.0% being from chemicals (0.9 percentage points) and motor vehicles (0.5 percentage points). The improvement in manufacturing in Q2 2016 together with the improvement in retail trade in May 2016 suggests that SA GDP should record positive growth in Q2 2016, helping SA to avoid a technical recession.

During 2010, SA manufacturing activity grew by 4.7%y/y, which was obviously a vast improvement on the 13.5%y/y decline recorded in 2009. In 2011, production averaged a more modest rise of 2.8%, with the sector experiencing significant disruptions due to strike activity. For 2012, manufacturing growth averaged a mere 2.3%, which is somewhat understandable given the weakness in the global economy and the extensive mining strikes. In 2013, activity rose by an average of only 1.4%y/y, which is really more stagnation than expansion, with the motor industry heavily disrupted by labour unrest. In 2014, South Africa’s manufacturing production increased by a very disappointing 0.2%y/y. This was despite the Rand/Dollar weakening by 30% over the preceding three years. Clearly the sector was plagued by periodic electricity outages. In 2015 as a whole, South Africa’s manufacturing sector averaged growth of -0.04% for the year as a whole which was the worst annual performance since the 2009 recession, and signalled that the sector experienced stagnation or a low intensity recession.

In contrast, the most recent improvement in manufacturing production is very encouraging and could be signalling a revitalisation of the manufacturing sector supported by the combination of import substitution, and some currency induced improvement in exports. This trend needs to be carefully monitored and encouraged as it could provide the basis for a broader improvement in South Africa’s economic prospects during 2017.

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