Small spark from key sectors not enough to keep out economic chill
STRONGER mining and manufacturing production during the second quarter helped South Africa dodge a technical recession, but industry executives this week said these two crucial sectors would continue to show strain, giving no relief to concerns of very weak economic growth this year.
These sentiments were supported by Stats SA reports on mining and manufacturing production and sales, showing that the economy struggled at the start of the third quarter.
The data dampened the good news published earlier in the week when Stats SA reported a better-than-expected 3.3% lift in GDP during the second quarter from a contraction of 1.2% in the first three months.
The growth spurt helped the economy to avert a technical recession, defined as two consecutive quarters of negative growth.
Even so, economists have warned the momentum may not be sustained into the third quarter as the possibility of a strike in the platinum sector looms and domestic and global demand and growth remain challenging.
Retail sales figures to be published on Wednesday will give an indication of the economy’s health through the third quarter.
“Our core view — that South Africa’s economy faces a prolonged period of very weak growth — remains unchanged,” said John Ashbourne, Africa economist at London-based Capital Economics.
Ashbourne said mining production — a bedrock of the South African economy — was “surprisingly bad” after it declined 5.4% year on year in July, led by poor performances from coal and platinum group metals. Output growth in iron ore had returned, however.
Weakness in manufacturing was widespread. Production increased 0.4% on annual comparison, helped by growth in petroleum and chemical output.
Roger Baxter, CEO of the Chamber of Mines, said the data “illustrated the significant pressure the sector is under”.
Johan Theron, an executive at Impala Platinum, one of the world’s largest platinum producers, said mining companies in general were producing as much as they could despite sustained weakness in metal prices and demand.
They had to do this to counter very high fixed costs, he said.
“The other side of that is while you’re doing this you’re not generating enough cash to invest in new projects and future production,” Theron said.
As a consequence, production in the platinum industry, which peaked at 5.5 million ounces a year in 2006, has dwindled to 4 million a year and there is a prospect of a further drop over the next four years.
Platinum is used mainly in jewellery manufacture and the automotive industry.
“The real risk is if metal prices and profitability don’t reassert themselves such that we can start investing,” Theron said.
Meanwhile a dispute between the Association of Mineworkers and Construction Union and Anglo American Platinum indicates there may be a strike in the third quarter.
But Theron said: “We’re still some distance off the possibility of a strike. We’re confident we’ll find a sustainable solution.”
Isaac Matshego, economist at Nedbank, said the sector remained fragile.
“A strike would definitely disrupt the positive momentum.”
He said platinum, as a significant contributor to mining GDP, was important because it also produced other minerals, such as gold, albeit in small quantities.
“When the platinum strike halts production activity you can see the impact on the output of other minerals,” he said.
The manufacturing sector is also battling the effects of low demand.
Philippa Rodseth, executive director of the Manufacturing Circle, said: “We’re doing everything we can on the supply side but if your demand is low, you’re producing less.”
During the second quarter the industry’s contribution to GDP grew 8.1% due to higher production in petroleum, chemical products, rubber and plastic products. Production of motor vehicles, parts and accessories and other transport equipment also contributed.
A weaker exchange rate fuelled export-led growth in manufacturing. Exports increased by 18.1% and imports decreased 5.1%, Stats SA said. Although the rand strengthened 10.8% against the dollar from January to July, the period was marked by currency volatility.
Economists said the bottom line is that growth in 2016 will be weaker than last year’s 1.3% — which was South Africa’s worst performance since the 2008-09 global financial crisis — and still exposes the country to the risk of a sovereign credit rating downgrade in December.
Joe de Beer, deputy directorgeneral for economics statistics at Stats SA, said for 2016 it would be “difficult to reach 1% or more if the first half’s growth is 0.3%”.
Only two sectors — agriculture, forestry and fishing and electricity, gas and water — contracted in the second quarter, by 0.8% and 1.8% respectively.
Reserve Bank governor Lesetja Kganyago said during a lecture this week that the Reserve Bank would revise its economic growth forecast upwards from 0% following the improved GDP data.
But he added that hopes for a halt in interest rate hikes were premature.
South Africa’s economy faces a prolonged period of very weak growth