Manufacturing (and Mining) Malaise

Manufacturing data out today from Stats SA show that July saw drop in manufacturing output of 7.9% – the biggest year-on-year fall since October 2009.  We also had numbers on mining today, showing a 7.7% year-on-year fall in July, compared to a revised 5.4% drop in June.  While there have been some signs of an improvement in business confidence, these official figures present a worrying picture, as mining and manufacturing are two crucial sectors of the economy.   What do our experts make of it?

Mike Schussler from economists.co.za:

Manufacturing is now at 11% of GDP down from 17% of GDP six years ago. The strike has knocked the industrial base of South Africa very hard and the Neasa lockout will still play a role in August, and possibly this month – so manufacturing is not going to see the recovery we are hoping for. For all the incentives from the dti, the weak Rand, and low interest rates, the sector is still below the level of early 2008! This is hard life for those involved – and it shows – as the employment levels in manufacturing are down to levels seen in 1971/2. After 42 years of industrial policy and growth programs the sector continues to shrink.  Perhaps we have a lesson to learn, and that is that firms cannot take endless abuse and punishment from those they employ, and endure rules that make life difficult for big firms who need a host of lawyers to get through B-BBEE and other legislation. Never mind the small and medium sized firms. Add poor service deliver and infrastructure challenges – read electricity, roads, and water supply shortages.  We may in fact be at the start of a big reality check!

Professor Raymond Parsons, North West University Business School:

The larger-than-expected fall in manufacturing output confirms, if confirmation is needed, the significant cost to the economy of the recent steel and engineering industries strike. Manufacturing output will undoubtedly recover in the months ahead but SA will now be lucky to reach 1.5% economic growth in 2014 as a whole. Other forecasts of 1.7%, 1.8% and even 2% growth this year are looking decidedly optimistic, unless there is a strong economic surge in the next few months. The current poor performance of the manufacturing sector also reinforces other two things: firstly, the message of the recent WEF Global Competitiveness Index in ranking labour relations in SA at the bottom-of-the-class, and secondly, that the MPC meeting next week would be wise to leave interest rates unchanged for the time being.

Nedbank Economic Unit:

While the decline in manufacturing came off a high base in the same month in 2013 and was also partly due to the metal worker’s strike, the figure was still poor.  The performance of the manufacturing sector will remain lacklustre in the months ahead. While output growth could be boosted by base effects, improving global demand and a weaker rand, this will be offset by weak domestic demand.   Today’s data, both mining and manufacturing, show that the production side of the economy remains very weak. The Reserve Bank still faces the dilemma of striking a balance between weak growth and heightened inflationary pressures. We believe that the SARB will raise interest rates by another 0.25 percentage points in November, but this will depend on the inflation trajectory and the movements of the rand at the time.

 

Investec:

The metals and engineering strike, in place from 1 – 29 July, will have accounted for much of the contraction in manufacturing. The plastics and metals industries and the electrical machinery and equipment industries were directly impacted.   The short-term, negative effects of the strike will dissipate in subsequent months as production returns to normal. However, based on the advance indications provided by the PMI, activity remained suppressed in August.   Production is being constrained by high operating costs, weakening domestic demand and sluggish export growth. An additional constraint on production pertains to the slow implementation of the government’s infrastructure programme and non-compliance with public procurement policy and regulations.  Subdued activity in both the production and consumption sides of the economy, and relatively weak economic growth prospects going forward, favour an unchanged interest rate decision next week.

Conclusion:

The twin slumps in manufacturing and mining are disturbing.   These sectors are not growing, and future growth may be accompanied by more mechanisation.   These M&M numbers are not sweet at all.

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carl reiner (@carlreiner):  A memorable event at The Chinese Theatre, made so by creative Mel Brooks placing his hands in cement- one hand had 5 fingers, the other, 6.

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