SA manufacturing production declined further in November despite sustained Rand depreciation

In November 2015, SA manufacturing production fell by a disappointing -1.2% m/m in November, after declining by -1.7% in October 2015 (monthly data is seasonally adjusted). The market was expecting manufacturing activity to fall by -0.3%m/m in November 2015. The manufacturing sector has declined in 5 of the last 12 months and is on the brink of a sustained recession. On an annual basis, manufacturing declined by -1.0%y/y in November 2015 and has recorded an annual decline in production during eight of the last twelve months.

The fall-off in production during the November 2015 was relatively broad-based, with five of the ten major sub-sectors of manufacturing recording a decline in output over the past year. This included a -4.3%y/y drop in clothing production, a -1.5%y/y fall in petroleum output, and a massive -7.0%y/y slump in iron and steel manufacturing. Many of the major sub-sectors of manufacturing have been under pressure for the past year, hurt by limited electricity supply and labour market disruptions.

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 the first eleven months of 2015, South Africa’s manufacturing sector has shown no growth at all and risks recording a decline in output for the year as a whole.

The ongoing weakness in South Africa’s industrial output reflects a wide range of factors including problems with low productivity, regular labour market disruptions, high import intensity, weak business confidence and infrastructure bottlenecks, especially electricity. It seems fair to argue that the manufacturing sector is effectively in recession. 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. Hopefully the recent Rand weakness will systematically start to encourage local retailers to source more of their products domestically, while at the same time helping to lift and expand South Africa’s manufactured exports. South Africa’s import and export performance needs to be closely monitored in order assess whether the sustained Rand weakness will force to the economy to re-balance and not simply lead to higher imported inflation.

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