In March 2016, SA manufacturing production fell by a disappointing 0.3%m/m, after increasing by a very welcome 1.6% in February 2016(monthly data is seasonally adjusted). The market was expecting manufacturing activity to rise by 0.4%m/m, encourage my the more recent improvement in the PMI data. On an annual basis, manufacturing declined by 2.0%y/y in March 2016, which was also worse than expectations for a drop of -0.9%y/y.
The decline in production during March 2016 included sharp falls in food, clothing, steel and furniture production. In contrast, there was a solid rise in paper and printing production as well as vehicle and refined fuel output.
During the first quarter of 2016, SA manufacturing rose by a very modest 0.1%y/y. While the increase is extremely small and obviously far from ideal, it was at least positive and should help South Africa to avoid a return to outright recession conditions. In essence, SA manufacturing activity continues to stagnate, with a modest decline in manufacturing capacity utilisation levels (see chart attached). The key area of weakness in manufacturing activity over the past three months has been food production, which fell by a substantial -3.1%q/q, reflecting the impact of the severe drought. In contrast, there was a net increase in paper and publishing, steel, and motor vehicles production during the quarter.
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 1.5%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, Rand weakness does not automatically translate into increased manufacturing production, especially when the sector is plagued by periodic electricity outages. In 2015 as a whole, South Africa’s manufacturing sector averaged growth of -0.02% for the year as a whole. This is the worst annual performance since the 2009 recession, and signals that the sector is experiencing a low intensity recession. The small improvement in production during the first quarter of 2016 is certainly not enough to change the established weak and stagnant trend and there is still no firm indication that import demand has been switched in favour of local producers as a result of Rand weakness, but we continue to monitor production trends very closely including the most recent surge in the PMI to 54.9 index points in April 2016.
The ongoing weakness in South Africa’s industrial output reflects a wide range of factors, which we have highlighted on numerous occasions. There is clearly the risk that the weakness in the manufacturing (and mining) sector leads to increased job losses, which then further weakens the broader business sector, forcing the economy closer and closer to an outright recession. Correspondingly, changes in employment remain one of our prime areas of research in South Africa. Without a pick in private sector fixed investment spending it is going to be difficult to lift South Africa’s growth rate as well as formal sector employment on a sustainable basis.
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