Fall in manufacturing slows in May, June
The dramatic plunge in manufacturing production slowed during May and June as the economy began moving out of the harshest phase of the Covid-19 lockdown restrictions. But it remains under the intense pressure that was present well before the Covid-19 crisis set in, pointing to a bleak path for recovery, according to economists.
The dramatic plunge in manufacturing production slowed during May and June as SA’s beleaguered economy began the process of moving out of the harshest phase of the Covid-19 lockdown restrictions.
But the sector remains under intense pressure, which existed well before the Covid-19 crisis set in, pointing to a bleak path for recovery, economists say.
Manufacturing production contracted 32.4% in May and 16.3% in June on an annual basis, figures released by Stats SA on Tuesday showed.
The annual declines were slower than those in April, during the worst of the lockdown when SA was kept under level 5 restrictions and only essential goods and services could be bought or produced.
April manufacturing production showed a 49.4% fall, surpassing the worst decline previously reported, which was during the financial crisis in 2009.
Though month-on-month production recovered 30.4% in May and 16.8% in June, Stats SA said seasonally adjusted manufacturing production decreased 30.2% in the second quarter of 2020 compared with the first quarter. All 10 manufacturing divisions reported negative growth rates over this period, the agency said.
The June figures, however, were somewhat better than forecast with six economists polled by Bloomberg expecting a 25.8% contraction.
DATA CONSTRAINTS
Though the declines slowed down from April’s plummet, overall the data is “still really a terrible set of numbers considering how important manufacturing is for GDP, employment, taxes and exports”, PwC economist Christie Viljoen said.
May’s and June’s annual declines, which were published together due to data gathering constraints that the lockdown has placed on Stats SA, showed that the sector has shrunk for 13 consecutive months.
Accounting for about 13% of GDP and 10.4% of employment, the sector was already battling before the crisis hit, contracting 8.5% during the first quarter of the 2020, according to the latest GDP figures.
Alongside the pandemic, the sector faces continued uncertainty over factors such as electricity supply, with intermittent power cuts weighing on its performance.
The second quarter numbers reveal the full effect of the lockdown but many factories were already “on the margins” in terms of profitability before the crisis hit, Viljoen said.
Issues such as the threat of load-shedding, as well as continued weak demand, both locally and internationally, suggest the second half of the year will be “really difficult” for the factory sector, he said.
The effect on GDP is going to be “significantly negative,” Viljoen said. “We know that the second-quarter GDP numbers will look terrible and this confirms it.”
Though the overall downturn in production was less pronounced in the June print, “severe capacity destruction amid stringent lockdown measures will likely prevent the manufacturing sector from fully recovering to pre-Covid-19 levels in the near term,” FNB economist Geoff Nölting said in a note.
“The sector will likely continue to face material headwinds in the form of electricity supply constraints and costs, subdued domestic demand and low global competitiveness,” Nölting said.
The latest Absa/BER purchasing managers index (PMI), a monthly gauge of conditions in the manufacturing sector, showed that the sector had managed to stay in positive territory for a third consecutive month during July.
However, economists warned at the time that this signalled monthly improvements in activity levels, from the extreme lows recorded during the start of lockdown, rather than a return to pre-Covid-19 performance.
The PMI also showed that employment in the sector remains in the doldrums, with its employment index at 33 points in July, well below the 50point neutral mark, and not far off from April’s record low of 26.6 points.
SEVERE CAPACITY DESTRUCTION WILL LIKELY PREVENT THE MANUFACTURING SECTOR FROM FULLY RECOVERING TO PRECOVID-19 LEVELS