Production gains help SA avoid recession

MANUFACTURING and mining production increased by 2 percent in the second quarter leading to economists predicting that the data could help the economy avoid a technical recession and a potential downgrade towards the end of the year.

Data from Statistics SA yesterday showed that manufacturing output rose 4.5 percent year on year in June and 0.7 percent on a monthly basis, while mining production decreased by 2.5 percent.

Stats SA said manganese ore, diamonds, nickel and copper were the main contributors to the fall in mining production. The agency attributed the increases mainly to higher production in petroleum, chemical products, rubber and plastic products; wood and wood products, paper, publishing and printing; and food and beverages.

NKC African Economics senior economist Hanns Spangenberg said the improved production provided evidence of a nascent recovery in the manufacturing sector.

“Nevertheless, economic conditions remain constrained, with the SA Reserve Bank recently lowering its projection for real gross domestic product (GDP) growth this year to a complete standstill.”

South Africa’s manufacturing output rose more than expected in June, while mining production shrank at a slower rate than market estimates, raising hopes the economy could fend off a recession and ratings downgrades to junk later in the year.

Inflation

The economy shrank 1.2 percent in the first three months because of the drought; as major sectors of the economy contracted, battered by slack global demand; and the currency weakened, stoking inflation.

Analysts said the surprisingly positive data, along with a recent rally by the rand, could ease the strain on industry, as well as consumers, but warned that the relief might be short lived.

The rand has gained about 5 percent against the dollar in the last week to a 10-month high following local government elections that saw opposition parties make inroads into the ruling ANC majority.

“In the second half of the year, we expect risk aversion to come back. It is a very uncertain economic environment and there is a chance the ratings agencies could flag policy direction after the election. So we do not expect the strength of the rand to be sustained into the second half of the year,” said Johannes Khoza, a senior economist at Nedbank.

The SA Reserve Bank last month forecast 0 percent economic growth for this year.

“Weak growth coupled with the likely easing in CPI (consumer price index) inflation on a gradual dissipation of the supply side shocks – drought linked food price increases, lagged effects of past rand depreciation, fuel price hikes – would support the argument for no further interest rate hikes this year,” Investec economist Kamilla Kaplan said yesterday.

Kaplan said the increase in manufacturing production growth in the second quarter of this year was consistent with the increases in the purchasing managers’ index, which averaged 53.5 in the second quarter, up from 47 in the first quarter. – Additional reporting by Bloomberg