Re­ces­sion re­bound im­mi­nent in line with world trends

The Star Early Edition - - OPINION & ANALYSIS - Michael Ade Dr Michael Ade is the Chief Econ­o­mist of the Steel and En­gi­neer­ing In­dus­tries Fed­er­a­tion of South­ern Africa.

Ex­port com­pet­i­tive­ness in the met­als and en­gi­neer­ing sec­tor is piv­otal for eco­nomic growth and syn­chro­nised up­swing in the world econ­omy.

OUR re­view of the State of the Met­als and En­gi­neer­ing sec­tor in the first quar­ter of this year reaf­firmed the low-growth sce­nario, which saw a sec­ond con­sec­u­tive con­trac­tion in gross do­mes­tic prod­uct (GDP), tech­ni­cally cat­a­pult­ing the South African econ­omy into a re­ces­sion.

How­ever, the lat­est pre­dic­tion by the Steel and En­gi­neer­ing In­dus­tries Fed­er­a­tion of South­ern Africa (Seifsa) cap­tures an ad­justed an­nual eco­nomic growth tra­jec­tory, high­light­ing a mod­er­ate turn­around in GDP growth this year of 0.8 per­cent, which is gen­er­ally con­gru­ent with a global pos­i­tive outlook.

The re­cov­ery – al­beit slowly – of some eco­nomic fun­da­men­tals pro­vides some com­fort and ba­sis to ar­gue that the South African econ­omy is grad­u­ally weath­er­ing the de­pres­sion. Indi­ca­tions are that the trough in the cur­rent busi­ness cy­cle may have fi­nally been reached and a re­bound is im­mi­nent. There is op­ti­mism that sec­ond-quar­ter GDP fig­ures will pro­vide a mild im­pe­tus for slightly ro­bust growth from the sec­ond half of 2017 on­wards.

This is pos­si­ble given the gen­er­ally im­prov­ing in­ter­na­tional eco­nomic en­vi­ron­ment, un­der­pinned by mod­er­ate re­cov­ery of in­vest­ment and ex­ports.

More­over, de­vel­op­ments in key ex­ter­nal mar­kets – such as the SADC, the rest of the African con­ti­nent, Europe, Asia (par­tic­u­larly China) and the US – for lo­cally man­u­fac­tured prod­ucts are im­por­tant in grad­u­ally im­prov­ing de­mand con­di­tions, re­gion­ally and glob­ally. These should be ben­e­fi­cial to lo­cal ex­porters over the medium to long term.

Also, it is ex­pected that an im­prove­ment in the so­cio-po­lit­i­cal en­vi­ron­ment (in­clud­ing a clearer gov­ern­ment eco­nomic pol­icy stance) and in­ter­na­tional com­mod­ity prices will trans­late into bet­ter busi­ness op­por­tu­ni­ties and im­prove the fi­nan­cial po­si­tions and per­for­mances of lo­cal com­pa­nies.

M&E sub-sec­tor ben­e­fit

This is po­ten­tially good news for the man­u­fac­tur­ing in­dus­try at large and the met­als and en­gi­neer­ing (M&E) sub-in­dus­tries in par­tic­u­lar.

Seifsa’s first-quar­ter re­vised growth outlook for this year specif­i­cally sim­u­lates the M&E sub-sec­tors ben­e­fit­ing from these de­vel­op­ments and ex­pand­ing by 0.9 per­cent in the sec­ond quar­ter, thereby con­tribut­ing to a re­vised pre­dicted an­nual outlook of 1.2 per­cent. This fig­ure was re­vised down­ward from 1.4 per­cent, due to weaker than an­tic­i­pated first-quar­ter re­sults and de­te­ri­o­ra­tion of the outlook in 60 per­cent of the sub-in­dus­tries.

Al­though there is con­fi­dence for medium-to-long-term eco­nomic ac­tiv­i­ties in the M&E sub-sec­tors, the short-term fig­ures are cause for con­cern.

Seifsa is of the view that in­creas­ing pes­simism about cur­rent busi­ness con­di­tions and poor per­for­mance of key eco­nomic in­di­ca­tors does not presently bode well for pro­duc­tion ac­tiv­ity. Both the Absa Pur­chas­ing Man­agers In­dex (PMI) and the Pro­ducer Price In­dex (PPI) re­duced by 4.8 per­cent and 1 per­cent, re­spec­tively, from May 2017 to June 2017. This was ac­com­pa­nied by a re­duc­tion in the Unit Value In­dex for ex­ported com­modi­ties from 2.2 per­cent in April to -2.8 per­cent in May 2017.

Ad­di­tion­ally, an os­cil­lat­ing rand does not pro­vide con­fi­dence to busi­nesses. A weak rand trans­lates to high cost of ex­chang­ing cur­ren­cies, re­sult­ing in in­creas­ing im­port costs (in­clud­ing costs of in­puts). In­put costs are a fun­da­men­tal com­po­nent of man­u­fac­tur­ing in­put cost in­fla­tion and a trade-off be­tween ris­ing in­put cost in­fla­tion and the re­duc­ing PPI (in­clud­ing the PPI of stage of pro­cess­ing) im­pacts neg­a­tively on the mar­gins of com­pa­nies.

Seifsa closely mon­i­tors these in­di­ca­tors, as their per­for­mance at the mo­ment is cause for con­cern to the M&E sub-sec­tors.

A con­sis­tently poor per­for­mance may dampen the outlook and present a ba­sis for fur­ther re­vi­sion of our es­ti­mates.

Con­tem­po­ra­ne­ous to the need for im­proved eco­nomic in­di­ca­tors to­wards eco­nomic growth is ex­ports com­pet­i­tive­ness in the M&E in­dus­try. SEIFSA strongly be­lieves that ex­port com­pet­i­tive­ness will en­sure that out­put growth is con­sis­tent and sus­tain­able, gen­er­ally trans­lat­ing to bet­ter em­ploy­ment op­por­tu­ni­ties as com­pa­nies rally to boost pro­duc­tive ca­pac­ity in an­tic­i­pa­tion of higher than ex­pected de­mand for their prod­ucts.

Dual ap­proach will ben­e­fit

In­deed, an im­per­a­tive need ex­ists for all com­pa­nies in the M&E sub-sec­tors to be both in­ward look­ing (that is, sell within South Africa, in ad­di­tion to in­tra-com­pany trans­ac­tions to up­stream lo­cal com­pa­nies) and out­ward look­ing (that is, sell be­yond our borders and re­duce de­pen­dence on the lo­cal econ­omy) in or­der to ben­e­fit from an ex­pected eco­nom­i­cally buoy­ant aura.

In our first-quar­ter re­view of the State of the Met­als and En­gi­neer­ing sec­tor, we noted that the M&E pro­duc­tion ca­pac­ity ex­panded by 0.5 per­cent in Q1 2017, against our fore­cast of 1.3 per­cent. To­tal ex­ports de­creased by 8.4 per­cent in real terms. De­spite a stronger rand in Q1, im­ports also de­creased by 7.9 per­cent (real), which is in­dica­tive of a weak do­mes­tic eco­nomic en­vi­ron­ment. The ta­ble of ex­port-to-out­put ra­tios of the met­als and en­gi­neer­ing sub-in­dus­tries shows that 87 per­cent of de­mand for plas­tics, 77.5 per­cent of that for elec­tri­cal ma­chin­ery and 67 per­cent of that for metal prod­ucts is de­rived do­mes­ti­cally.

An in­ter­est­ing ob­ser­va­tion is that sub-in­dus­tries with the most sig­nif­i­cant ex­po­sure to the do­mes­tic econ­omy ex­pe­ri­enced the most se­vere con­trac­tion in out­put, while the op­po­site mostly held for sub-in­dus­tries with higher ex­port-to-out­put ra­tios. In ad­di­tion, sub-in­dus­tries con­tracted the most in Q1 2017, con­firm­ing a cycli­cal out­put pat­tern to that of the do­mes­tic econ­omy.

A par­a­digm shift and new strat­egy is needed in do­ing busi­ness in the M&E sub-in­dus­tries. Rather than con­duct­ing busi­ness as usual, a fo­cus on im­prov­ing ex­port com­pet­i­tive­ness is needed in or­der to en­hance prof­its and act as a buf­fer dur­ing dif­fi­cult times and sus­tained eco­nomic down swings. Ex­port com­pet­i­tive­ness is piv­otal if M&E com­pa­nies want to ben­e­fit from ex­pected do­mes­tic green shoots (given the cur­rent ex­pan­sion­ary mone­tary pol­icy stance) and in­creas­ingly op­ti­mistic global outlook. It is nec­es­sary to ig­nite and sus­tain eco­nomic growth as South Africa seeks to ben­e­fit from the broad­est syn­chro­nised up­swing the world econ­omy has ex­pe­ri­enced in the last decade.


All com­pa­nies in the M&E sub-sec­tors should be both in­ward and out­ward look­ing, in or­der to ben­e­fit from the in­creas­ingly op­ti­mistic global outlook.

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