Slump in demand threatens recovery

Weaker rand, exports buoy ailing manufacturing sector

BETTER performance in the manufacturing industry in June may help South Africa to avoid a recession this year — but consumers are still not splurging on big-ticket items such as furniture and cars.

Manufacturing production grew 4.5% in June — an increase for a third consecutive month this year, Stats SA said on Thursday. For economists this indicated a revitalisation of an ailing sector and fanned expectations that, together with stronger mining data for June, the sector had saved the country from spiralling into a recession this year.

Barclays Africa economist Miyelani Maluleke said: “South Africa is very likely to have avoided a technical recession. The mining sector rebounded strongly in the second quarter and an easing in drought conditions is likely to have helped in agriculture. This, together with the strong manufacturing performance in the second quarter, means we could see GDP growth rebound by about a 2% quarteron-quarter seasonally adjusted annual rate.”

A technical recession is two consecutive quarters of negative growth.

FNB economist Mamello Matikinca said: “We have escaped a technical recession.”

The stronger manufacturing performance, which had been boosted by improved exports, could be sustained into the next quarter.

“On the demand side, especially the domestic side, the detail suggests consumers are still staying away from big-ticket items,” she said.

Furniture and other manufacturing components had shown contraction for “quite some time”. In June, furniture contracted 8.1% year on year in terms of volume compared to 12.7% for the same period last year. Vehicle sales, which slumped 17% in July, showed domestic demand was subdued and remained a constraint.

“We’ll likely see this weigh on car manufacturing data over the coming months,” said Matikinca.

The sector had been boosted CLEAR SIGNAL: South Africans are not splashing out on high-end electronic products, furniture or cars by higher production in petroleum, chemical products, rubber and plastic products. Wood and wood products, paper, publishing and printing and food and beverages also helped strengthen performance.

Maluleke said an increase in formal-sector manufacturing jobs during the second quarter was encouraging, but a sustained recovery and investment in new productive capacity was necessary if more jobs were to be created.

Stable electricity supply and external demand on the back of the weaker rand would have buoyed manufacturing activity in the second quarter.

Earlier this month, Barclays’ manufacturing purchasing managers index for July remained above the threshold of 50, which signalled a very good start to the third quarter, said Maluleke.

But the stronger currency would “make domestic goods look a little pricier to foreigners” and “encourage South Africans to look for foreign alternatives of some goods”.

Meanwhile, mining production rose 4.2% on a quarterly basis, seasonally adjusted during the second quarter of this year. On a year-on-year basis it fell 2.5% from a year earlier compared to 3.9% year on year in May, marking the third consecutive month of deceleration in the rate of contraction.

Quarterly seasonally adjusted mining production was used to calculate the sector’s contribution to GDP.

Investec economist Kamilla Kaplan said: “It suggests that its contribution to [second-quarter GDP this year] was positive. In the [first quarter] the decline in mining production was a significant contributor to the contraction in GDP.”

The increase in most commodity prices from January lows had been sustained through the second quarter and may have supported mining production. Over the medium term the mining sector would have to contend with a “broadly low commodity price environment”.

South African consumers are still staying away from big-ticket items

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