Nedbank’s Economic unit comments that ZA manufacturing production growth slowed to 2.2 % y-o-y in May from the unexpected 7.1 % rise in April. The April rise was the result of seasonal factors, so the slowdown in May was not unexpected. The market had expected a deceleration to 2.9 % y-o-y. On a seasonally adjusted basis, manufacturing production declined 1.7 % m-o-m in May. Meanwhile, mining data was also released. Total mining output was down by 0.7 % y-o-y in May after rising by a revised 0.7 % in April. Production was up by a seasonally adjusted 4.5 % m-o-m after increasing by a revised 2.8 % in April. What do we learn from all these numbers? ZA Confidential sought the views of some of our experts….
Mile Schussler from economists.co.za:
Manufacturing is up a lot more than people think. The adjustment to manufacturing for the year to May is up from 1,4% growth to 1,7% growth. It is looking increasingly likely that 2nd quarter GDP data will be much much stronger than thought before. The fact that March data was so negative will fall away in June and Manufacturing will increase with over 1,5% or about 6% seasonally adjusted and annualised. This will make the minus 8% seem very weak and even this gets adjusted in the new data. Mining, while down on a year ago (when mines were catching up after the impala strike action), was a little disappointing but is up month on month two months in a row and will make the June quarter strong too. Expect a major upward revision of GDP data.
Craig Pheiffer from Absa Investments:
With concerns around the slowing consumption (demand) side of the economy, the contraction in mining and manufacturing production (the supply side) over the course of May does not augur well for domestic growth prospects in 2013. Mining production did come in better than expected for the month of May and the previous month’s year-on-year growth number was revised from a negative to a positive but the fact remains that mining production is still shrinking. As we face further wage negotiations and possible strike action in the industry in the months ahead, the situation could get worse before it gets better. Mining production makes a much smaller contribution to GDP these days but it still plays a significant role in generating export revenues. Manufacturing production came in slightly below expectations but the 2.2% y/y growth rate for May is in line with the recent Purchasing Managers’ Index (PMI) reading of 50.4 index points recorded for the same month. The PMI reading improved in June to 51.6 points and this leads to the hope that the volume of manufacturing production expanded a bit more over the course of June. Manufacturing was a drag on domestic economic growth in Q1 2013 (GDP of 0.9% q/q) but after two months of positive data the sector could make a positive contribution to GDP in Q2 where a q/q seasonally adjusted and annualised rate of 3.3% is forecast. The softness in recent economic data could lead one to believe that further monetary policy easing is necessary, but it’s unlikely that the SARB will budge while inflation is high (admittedly still cost-push, mostly with little core inflationary pressure). An unchanged monetary policy is therefore expected to prevail for some time into 2014.
Mohammed Nalla from Nedbank Capital:
Mining production, while beating estimates, has still contracted over the month to -0.7% y/y , while Manufacturing production came in significantly lower than consensus at 2.2% y/y from last month’s 7.1%. Non-gold output rose 1.9% y/y while the gold mining sector continued to build on losses, shrinking by a massive 14.6% y/y as labour unrest and rising cost pressures compound a falling bullion price. Turning to manufacturing, a softer PMI number in May acted as a leading indicator to the lower manufacturing print today. Despite an uptick in June’s PMI released earlier this month, it remains marginally in expansion and does not paint a picture of robust health, but rather of an economy beset with structural impediments which are seeing South African industry fail to capitalise on a much weaker rand exchange rate. Persistent labour unrest is compromising the output of goods while unsustainable wage demands place additional pressures on business, eroding the sustainability of many enterprises. Constructive engagement by the private sector, government and labour is required as a prerequisite of getting the economy on track, with each player needing to look toward the greater good in order to inform a sustainable growth strategy going forward. This is likely to be elusive over the short term as political considerations rise to the fore amid an election year next year.
Coenraad Bezuidenhout of the Manufacturing Circle:
Manufacturing production and sales figures for May showed that manufacturing recovery was still fragile. In rand term, sales registered year-on-year growth of 8.5%, despite production volumes growing at only 2.2%. This is made possible by the weaker rand, which is helping to ameliorate destructive margin squeeze in low demand, high cost conditions. High domestic costs, combined with the relative affordability of capital does mean that should protracted labour unrest occur in upstream sectors such as mining and agriculture and have knock-on effects for industrial peace in manufacturing, mechanisation and imports would become an immediate threat to retaining jobs in the sector. It may also see reversals in its currently fragile growth. More robust growth in manufacturing production and sales stats would be desirable. It could result if a concerted effort was made to improve the security of our energy and water supplies, and to bring these and other publicly administered costs into line with the prices levied in key competitor markets, such as in those of our BRICS partners, and in Eastern Europe. Over the longer term, it would be crucial to maintain the access that we enjoy to established export markets, to remove red-tape and infrastructure barriers to trade with other African economies, and to drastically improve our access to markets in Asia and South America.
Gerhard Lampen from Sanlam iTrade:
The SA economy is really showing signs of fatigue. This confirms economist forecasts of GDP growth slowing to less than 2.5%, with downside risk. Research showed that the SARB is much better at forecasting GDP than economists. The SARB forecast 2.3% growth a month ago. With the looming strike season, risks are surely on the downside. With CPI expecting to breach the upper band of 6% there will be no change to interest rates. Governor Marcus will keep rates steady until end 2014. Equities remain the best asset class to be invested in.
There is little to cheer and much to ponder in the latest numbers, coming the day after the IMF cut its GDP estimate for this year for the ZA economy to just 2%. And further unrest in mining could be very troublesome indeed……
Tweet of the Day:
EricWest™ (@EricJWest): I got caught taking a pee in the local swimming pool today. The lifeguard shouted at me so loud, I nearly fell in.