Manufacturing and mining may improve

bissekerc@businesslive.co.za

Financial markets are likely to remain volatile after Fitch Ratings joined S&P in downgrading SA to junk status last week.

Fitch is the first of the agencies to cut the rating on SA’s rand-denominated debt to junk status. The downgrade could prompt some forced selling of government bonds from global hard currency bond indices.

The Emerging Market Bond index requires a country’s long-term foreign currency ratings to be ranked above “high yield” by at least two major ratings agencies.

Statistics SA will publish manufacturing data on Tuesday, followed by retail sales on Wednesday and mining production data on Thursday.

A modest recovery in the manufacturing sector is expected after the Absa Purchasing Managers index (PMI) averaged 51.7 index points in January and February, compared with just 47 in December. A reading above 50 indicates positive sentiment and possible expansion.

But despite the improvement in the PMI, manufacturing output fell by a very disappointing 0.4% month on month in January. During 2016, the sector grew 0.8% year on year, leaving manufacturing production still well below pre-crisis levels.

“Clearly the country’s manufacturing sector is still struggling to gain any meaningful traction,” said Stanlib chief economist Kevin Lings. “Hopefully the anticipated improvement in agricultural production together with some pick-up in mining activity will combine to lift manufacturing production over the coming months,” he said.

While the mining sector is expected to respond to more favourable commodity prices — the price of iron ore has more than doubled over the past year — it remains constrained by domestic policy uncertainty and a lack of fixed investment.

Though the mining sector accounts for only about 8% of SA’s GDP, it creates a huge demand pull, boosting GDP by 2.3 units for every unit of mining output generated.

So, a recovery in mining should help to lift other sectors, especially manufacturing.

Retail sales data will be released on Wednesday, but with negative retail sales growth in December and January, consumer confidence in tatters and household credit extension at record lows, there is little expectation that the sector experienced much improvement in February.

Consumption expenditure by households grew by just 0.8% in 2016 compared with an annual average of 3.5% over the past 10 years and remains subdued.

The Bureau for Economic Research was expecting real consumer spending growth to recover slightly to 1.4% in 2017 on lower inflation, slightly better employment growth and firmer asset prices.

But this hinged on an improvement in the economy’s overall growth performance, something that President Jacob Zuma’s cabinet reshuffle, the downgrades and rising political uncertainty may have snuffed out.