Mixed views surface ahead of output data

VIEWS are mixed as to whether figures due this week will show a continued improvement in the performance of the manufacturing sector, the country’s second-biggest.

SA’s purchasing managers index (PMI), seen as a reliable health gauge for manufacturing, rebounded strongly in February and rose above the neutral level of 50 for the first time in seven months.

The index jumped to 53.6 from 49.1 in January, signalling an expansion in activity.

That suggests that manufacturing output should have accelerated since January, when it rose 3.9% compared with the same month last year. Statistics SA will release the February figures on Thursday.

But growth forecasts in a poll by Bloomberg last week range from between 1.8% to 4.5%.

Standard Bank economist Thabi Leoka expects the recovery in mining after strikes last year to have filtered into manufacturing production in February. She is forecasting growth of 4.5% year on year.

Mining output figures for the month are also due on Thursday and are seen showing an expansion after growing 7.3% in January.

Ms Leoka points out that there could be some “downside pressure” on manufacturing output from the motor vehicle industry, as demand weakens in Europe — one of the main destinations for locally manufactured products.

Nonetheless a key survey from the Bureau for Economic Research last week showed that confidence in the manufacturing sector improved to 42 points from 38 points in the previous quarter. This supports the view that production will improve, at least in the near term. The rand’s sharp depreciation this year is seen as supportive as it makes locally manufactured exports more competitive abroad.

Nedbank economist Isaac Matshego also believes that manufacturing output rose 4.5% year on year in February, boosted by stock replenishment.

But he is wary about the longer term, saying that the weaker rand and high wage settlements will also raise the cost of production.

A sharp fall in the PMI last month struck a negative note. The index fell to 49.3 from 53.6 in February, suggesting that activity in the sector had contracted.

“In our view, the upswing in manufacturing production ... will not be sustained for the remainder of the year,” Ms Leoka said. But she added that the competitive edge offered by the weaker rand would support a “moderate” improvement in output this year.

Last year, the sector, which accounts for about 15% of gross domestic product, grew 2.4%.

“We think the performance we’ve seen in manufacturing has been surprising to the upside … and still remain of the view that economic fundamentals don’t support this growth,” said ETM economist Jana le Roux.

A breakdown of recent growth in the sector showed that it had been led mainly by production of petrochemicals, chemical, rubber and plastic products. This was unlikely to last and the weak global growth was a big concern.

Figures from the Reserve Bank today are expected to show that SA’s gold and foreign exchange reserves declined slightly in March, taking gross reserves to $50.2bn and net reserves to $47.02 bn.