Pick up in Manufacturing

July’s manufacturing production number rose by 5.4%, year on year, a big jump on the June number of 0.5%. Is this sustainable? We asked our experts.

Sizwe Nxedlana from FNB.
The index was boosted by strong growth in the production of: motor vehicles and parts (9.9% y/y), machinery and metal products (+7.9% y/y), glass and non-metallic mineral products (7.2% y/y) as well as food and beverages (6.1% y/y). On a month-on-month basis manufacturing production grew by 5%. We are encouraged to see that manufacturing output grew ahead of expectations in July and the purchasing managers’ index for August jumped to its highest level in 6 years. However, it is likely that near term manufacturing sector growth will be constrained by the striking in the automotive and components industry that occurred in August and is currently ongoing.

Nedbank’s Economic Unit:
The annual growth rate was mainly driven by the ‘basic iron and steel, non-ferrous metal products, metal products and machinery’ division which contributed 1,6 percentage points.
On a seasonally adjusted basis production rose by 5,0 % m-o-m. For the three months to July, manufacturing production increased by 2,2 % q-o-q mainly as a result of the ‘basic iron and steel, non-ferrous metal products, metal products and machinery’ division which accounted for 1,3 percentage points of the growth.
The seasonally adjusted Kagiso PMI showed some signs of improvement in August, rising to its highest level since August 2007 and staying above the key 50 level for over five months. Despite this, labour-related production disruptions are likely to have a negative impact on output growth in the short term. The sector will also continue to face subdued demand conditions. In the large export-orientated industries, output growth will be contained by the weak growth in the Eurozone, a more measured Chinese economy and weaker international commodity prices. However, the weaker rand will temporarily offset some of the pressures. At the same time, cost pressures will remain elevated, with high electricity costs, rising unit labour costs and expensive transport and logistics. In the inwardly-focused industries, demand conditions will also be broadly softer as household spending moderates and fixed investment activity remains weak.
Despite the better-than-expected expansion recorded in July, manufacturing production and exports are likely to remain subdued, limiting the pace of overall economic activity to around a modest 2 %. While growth remains contained and the risk to the downside, inflation is rising with the risk to the upside given the strife with labour and a weak and vulnerable rand. Consequently, the MPC will probably keep rates on hold until the second half of 2014.

This was welcome data, but the strike season is not yet over, and we must remain cautious.

Tweet of the Day:

Puns (@omgthatspunny): When William joined the army he disliked the phrase ‘fire at will’

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