A fifth of factories are standing idle
SA manufacturing not using 19.7% of capacity as economies stutter
● A fifth of SA’s current manufacturing capacity is unused — underscoring the many challenges that face a sector that is critical to SA’s faltering economic growth.
The last time that this level of underutilisation was recorded was four years ago when growth in the industry was flat amid a slowdown in agriculture due to drought, and a boost in mining due to increased platinum group metal production. The economy grew 1.3% that year.
With growth expected to muster barely 1% this year, the outlook for manufacturing is not forecast to improve yet.
Philippa Rodseth, executive director at the Manufacturing Circle, said: “One-fifth of current manufacturing capacity is not being used. That is really significant.”
The Stats SA manufacturing utilisation survey published in November indicates that underutilisation is at 19.7%, due to insufficient domestic and global demand for manufactured products as growth in global economies stutters in the face of prolonged trade tensions between the US and China.
“It supports our view and what we are hearing from our members. Very few of them are operating at full current production capacity,” said Rodseth.
Investment in manufacturing is also likely to be slow as it does not “make sense” to invest in new production capacity for companies functioning below capacity, she said.
Business confidence remains depressed, according to several indices. On Tuesday the Reserve Bank’s leading indicator — a gauge of the business growth cycle over the next six to 12 months — extended its year-long slide by 1.6%.
On Wednesday, Rand Merchant Bank’s (RMB’s) business confidence index compiled by the Bureau for Economic Research rose to 26 points for the fourth quarter from a thirdquarter low of 21 points — the first improvement in two years. But at below the 50-point neutral level it is still considered negative.
Rodseth said the metals fabrication subsector is experiencing difficulty and suffered the closure of some companies, creating premature deindustrialisation in some areas.
But there are “pockets of excellence”, such as agroprocessing, where there are opportunities for growth through beneficiation and export.
Systemic demand and supply-side constraints, especially related to electricity provision, have to be addressed. “If we don’t have manufacturing in the engine of growth of the economy then the current unemployment stats are going to get worse because manufacturing has a high job multiplier factor,” she said.
Stanlib chief economist Kevin Lings said that over the past 10-15 years, SA’s manufacturing production had stagnated — “for example, in September 2019 the combined output was exactly in line with the level of output generated at the start of 2006”.
Over the past 11 years the level of fixed investment in the sector dropped 25% and levels of productivity also declined, undermining the competitiveness of the industry.
“It is no surprise that the decline in productivity has been associated with a rise in SA’s import intensity,” said Lings.
There are examples of outperformance, especially in the food sector, but “the overall performance has been deeply disappointing given the benefits associated with a vibrant manufacturing sector as well as government’s policy intention to grow the sector”, Lings said in a research report.
Contractions for the third quarter of 2019 are also expected in manufacturing production, mining, transport and electricity. They will contribute negatively to growth for the quarter, which Stats SA will report on Tuesday.
Mpho Tsebe, an economist at RMB, said: “The construction sector is also expected to shrink for the third consecutive year.” RMB forecasts -0.5% for third-quarter GDP. Trading Economics expects a contraction of 1.7% for the quarter.
Elize Kruger, senior economist at NKC African Economics, which forecasts 0.4% for the quarter and 0.3% for the year, said retail growth is expected to be flat, with high fuel prices, taxes and elevated unemployment weighing on consumer spending.
At the same time, strong demand for unsecured lending products in a tough economic climate will see lenders review their criteria “to manage the deteriorating portfolio performance, which could make access to credit even more difficult for consumers”, credit bureau Experian said this week.
Commenting on expectations for GDP data, Kruger said: “The quarterly growth rate could potentially be negative if there are nasty surprises in the agricultural or transport sectors, which we have assumed to have remained flat in the [third quarter].”
However, Paul Makube, senior agricultural economist at FNB, forecast a slight rebound in the sector after improvement in field crops.
There are doubts that the economy can muster the revised 0.5% growth for the year. The Reserve Bank, credit ratings agencies and the International Monetary Fund recently lowered their growth forecasts for SA in 2019 and over the next three years.
Jameel Ahmad, global head of currency strategy and market research at FXTM, said: “Risks are skewed to the downside that the South African economy will be able to achieve the 0.5% GDP projections for the year. For the economy to achieve [this], the upcoming reading needs to show GDP expansion somewhere between 0.2% and 0.8% for the [third quarter] and then to hope that the [fourth quarter] manages to achieve the overall 0.5% expected for the year.”
‘Without manufacturing in the engine of growth, unemployment will get worse’