Meagre factory output growth disappoints
SA’s long-term manufacturing performance has disappointed, undermined by falling fixed investment, power outages and social unrest.
Substantially lower monthly Stats SA figures released on Thursday signal stagnation.
While agency data shows the sector increased 0.7% year on year, below Bloomberg consensus expectations of a 2.7% lift, manufacturing production dropped substantially in December, contracting 1.7% month-on-month after rising 1.2% in November. The Bloomberg consensus expectation was for a 0.4% increase.
Stats SA said the December contraction was relatively broad-based with six out of the 10 manufacturing sectors down. The production of vehicles contracted 13.8% month-on-month, publishing fell 9.4% and cement dropped 2.6%.
SA manufacturing is a R513bn sector in real gross value-added terms and comprises 11.2% of the economy, down from 15% in 1995.
Recovery in the sector is crucial for economic prospects because it has the potential to boost exports, investment, innovation and job creation.
The sector comprises 10 major subsectors, the largest being chemicals (25% of overall manufacturing), followed by the food and beverage sector (20%) and iron and steel (19%).
The Thursday data release is a key read for fourth-quarter GDP growth and completes the picture as to how the sector fared in the final quarter of 2023, and for the year as a whole.
Stanlib chief economist Kevin Lings said manufacturing activity is likely to remain under pressure in the first half of 2024, given the slowdown in global trade, persistently high domestic interest rates, electricity outages and weak final demand.
“Back in 1994, SA manufacturing represented more than 22% of GDP. This has dwindled to below 15% of GDP in recent years,” said Lings. “Although manufacturing production has partly recovered from the Covid pandemic, output is still 2.6% below the pre-Covid level of activity and a massive 16% below the peak level of production recorded in 2008.”
Lings said that while some of SA’s manufacturing sectors remain competitive by global standards, especially the production of food and beverages, the majority were undermined by falling levels of fixed investment, electricity outages and social unrest.
Causes included “looting in July 2021, periodic strike activity, lack of research & development as well as infrastructure/regulatory constraints. In other words, the underlying lacklustre performance of SA manufacturing has been developing for a number of years, and cannot be attributed to only Covid-19, floods or the most recent bouts of electricity outages”, said Lings.
RMB analysts said in a note: “This sector has been hit from all sides as demand for consumer goods has moderated, given elevated interest rates, but costs are also higher due to electricity supply constraints and more recently the impact of port congestion on input availability.”
While the sector was one of the main drags in third-quarter GDP, which contracted 0.2% quarter on quarter, falling 1.2%, manufacturing activity rose by a modest 0.1% quarter on quarter. Senior economist at Oxford Economics Jee-A van der Linde said the quarterly outcome implies a tiny positive contribution to total GDP at the end of 2023.
Investec economist Lara Hodes said that while loadshedding eased somewhat in December, the electricity supply predicament remains a challenge for the energy-intensive manufacturing sector and economy as a whole. “Moreover, the still subdued global manufacturing environment continues to undermine export potential.”
Hodes said that production fell in December for the seventh month running as intakes of new business suffered a further contraction according to the results of the December JPMorgan global manufacturing purchasing managers’ index (PMI) survey.
“Advance indications provided by the Absa-BER PMI for January reveal that the manufacturing sector remained depressed at the start of 2024, with both the business activity and new sales orders indices declining markedly during the month,” said Hodes.
Van der Linde said that overall, underlying local demand for manufactured goods is weak.
APPROPRIATE BALANCE
“What’s more, the Absa PMI dropped sharply to 43.6 index points in January 2024, down from 50.9 in December, indicating a poor start to the year,” he said.
Lings said that a competitive and successful manufacturing sector requires a combination of factors including supportive infrastructure, reliable power supply, appropriate regulation, and a stable and productive workforce.
Innovative and dynamic management, an appropriate balance between the use of technology and labour intensity, access to finance, and adherence to the rule of law, including the eradication of corrupt activities, are also critical for a strong sector, he said.