In June 2015, SA manufacturing production rose by an encouraging 0.9%m/m, after declining by a revised -0.6% in May 2015 (monthly data is seasonally adjusted). The market was expecting manufacturing activity to grow by 0.6%m/m in June 2015. Despite the improvement in June, the manufacturing sector has now experienced two consecutive quarters of decline, dropping by 1.2%q/q in Q2 2015 and falling by -0.5%q/q in Q1 2015. The sector is, therefore, effectively in recession. On an annual basis, manufacturing declined by -0.4%y/y in June 2015 and has recorded an annual decline in production during ten of the last fifteen months.
The fall-off in production during the second quarter of 2015 was relatively broad-based, with six of the ten major sub-sectors of manufacturing recording a decline in output. This included a -4.4%q/q drop in iron and steel production, a -3.3%q/q fall in chemical output, a -3.4%q/q slump in clothing and textile 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 is 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 regular bouts of labour unrest and periodic electricity outages. In the first six months of 2015, South Africa’s manufacturing sector has declined by an annual average of -0.5% and could decline during 2015 as a whole. Especially if steel production falls further.
The ongoing weakness in South Africa’s industrial output reflects a wide range of factors including problems with low productivity, regular labour market disruptions, rising import intensity, weak business confidence and infrastructure bottlenecks, especially electricity. It seems fair to argue that the manufacturing sector is in recession and is unlikely to improve significantly over the coming months. 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.
Download the presentation slides
Please follow our regular economic updates on twitter @lingskevin