Yearly manufacturing production growth surprised on the downside in March, slowing to 0.7% from 1.5% in February and falling short of market growth expectations of 2.5% year-on-year.
Responding to figures released by Statistics South Africa (StatsSA) on Thursday, Nedbank noted that the moderate yearly increase was largely the result of higher production in the basic iron and steel, nonferrous metal products, metal products and machinery sectors, as well as the wood and wood products, paper, publishing and printing categories, which each contributed 0.9 percentage points to the total tally.
On a monthly basis, seasonally adjusted manufacturing production declined by 1.9% in March and was down 1.6% quarter-on-quarter in the first three months of the year, with the bank noting that the March output slowdown was “probably” related to the power restrictions placed on heavy energy users.
Seven of the ten manufacturing divisions reported negative growth rates over this period, with the largest negative contributions to the decrease made by the petroleum, chemical products, rubber and plastic products division and the basic iron and steel, nonferrous metal products, metal products and machinery division, both of which narrowed by 2.7%.
“These manufacturing production figures still reflect subdued underlying conditions. These figures, together with very poor mining conditions in the first quarter, suggest that gross domestic product (GDP) growth in the first quarter is likely to be only barely positive, after the 3.8% annualised bounce in the fourth quarter of 2013,” Nedbank noted.
Also commenting on the StatsSA release, BNP Paribas Cadiz Securities economist Jeffrey Schultz said manufacturing activity remained under pressure in March, shadowing the Kagiso Purchasing Managers Index’s leading indicator, which slipped back to 47.4 – its 2009 recessionary level.
“Ongoing industrial action in the related mining sector, low capacity utilisation levels in many industries, elevated input-cost pressures and a still-subdued domestic demand environment leaves us sceptical on the ability of this side of the economy to contribute meaningfully to GDP growth – particularly in the first half of 2014,” he said, iterating Nedbank’s sentiments.
“We expect this to reflect clearly in first-quarter GDP growth figures, with our current tracking estimate for first-quarter growth standing at just 0.3% quarter-on-quarter,” noted Schultz.
Nedbank added that, despite ongoing difficulties, the weaker rand and stronger global demand were still expected to lift production and exports, especially in the second half of the year.
Growth rates for the year would also be enhanced by the low base created in the strike-afflicted second half of 2013.
“However, considerable downside risks remain, given rising production costs, uncertain and insufficient power supply, other infrastructure constraints and the strained relationship with labour,” the bank noted.
While the risk to the economic outlook remained on the downside, Nedbank expected inflation to remain above the South African Reserve Bank’s upper 6% inflation-targeting limit for the rest of this year and most of the first half of next year.
“Given the need to balance growth prospects with higher inflation, we anticipate that rates will rise by 25 basis points at two of the next four meetings,” Nedbank maintained.
Meanwhile, StatsSA on Thursday also released a report on the use of production capacity by large enterprises in February, indicating that large manufacturers used 80.8% of their production capacity in February, compared with 79.1% in the second month of the prior year.
Six of the ten manufacturing divisions showed increases in the use of production capacity year-on-year, with the largest increases recorded in the glass and nonmetallic mineral products division, the petroleum, chemical products, rubber and plastic products division and the food and beverages division.
The highest rates of use of production capacity in February were recorded in the radio, television and communications apparatus and professional equipment division (84.7%), the petroleum, chemical products, rubber and plastic products division (82.4%), the food and beverages division (81.5%) and the wood and wood products, paper, publishing and printing division (81%).