PRODUCTION in South Africa got off to a slow start this year with figures showing on Thursday that growth in mining and manufacturing slowed in January.

This coincided with calls by Deputy Finance Minister Nhlanhla Nene for the “operating environment” in the two sectors to be improved to speed up economic growth. He said significant increases in labour costs and low profitability in the two sectors threatened future investments.

Manufacturing and mining together account for almost 20% of gross domestic product.

Statistics SA figures showed mining production growth slowed to 3.1% year on year in January from 12.2% in December, while growth in manufacturing production moderated to 2.5% year on year from 2.8% in December.

Eight of the 10 manufacturing divisions contributed positively to the growth in manufacturing production. Although some of the moderation in mining and manufacturing growth can be attributed to strikes, it also reflects subdued local economic growth and a slow pick-up in global demand.

A seven-week strike in the platinum mining sector contributed to mining production falling in January. Economists warn of more pronounced decreases in mining production and exports of platinum group metals if the strikes are not resolved.

“A broader recovery in the economy and in business confidence depends largely on improving the operating environment in mining and manufacturing,” Mr Nene said.

BNP Paribas Cadiz economist Jeffrey Schultz said platinum stockpiles were probably low given the “longevity” of the strikes. This placed the export sector at risk should a wage agreement not be reached soon as platinum group metals were South Africa’s single largest export commodity, he said.

The consensus is that a recovery in the global economy and a weaker rand will benefit exports. But rising input costs, strikes and lower commodity prices could limit growth in exports.

Mr Nene said “pedestrian” economic growth in South Africa’s major trading partners, particularly the eurozone, meant demand from these countries would be sluggish. “This weak export demand means that we are unable to capitalise on the depreciated exchange rate.”

The government has initiated several incentive programmes in the manufacturing sector to improve production and value addition to manufactured goods. These include the Manufacturing Competitiveness Enhancement Programme and the Industrial Policy Action Plan.

Manufacturing Circle executive director Coenraad Bezuidenhout said that while more could be introduced, existing “accessible” incentives spearheaded by the Department of Trade and Industry were supporting local producers’ development.

“The department really engages us around issues of industrial policy. We are also happy that manufacturing has received significant allocations in the budget,” Mr Bezuidenhout said.

While local economic growth is expected to improve this year, Mr Nene said local markets could still face increased volatility as the US Federal Reserve (Fed) continued its monetary stimulus tightening in coming months.

The Treasury forecast the local economy would grow 2.7% this year, from 1.9% in 2013.

Mr Nene said addressing capital outflows that would occur as a result of the winding down of monetary stimulus by the Fed, or quantitative easing tapering, would require prudent policies.

“We must remain aware of the potential capital outflows and manage these risks through prudent macroeconomic policies,” he said.

Capital outflows were significant in the fourth quarter of last year, when investor concerns about quantitative easing led them to pull out of emerging markets, including South Africa.

Foreign portfolio investors changed from being net buyers of both local bonds and shares in the third quarter to being net sellers in the fourth quarter.

About R30.8bn in outflows was recorded in the fourth quarter of 2013 from inflows of R48.8bn in the third quarter, data from the Reserve Bank showed on Wednesday.

Mr Nene said South Africa would need to venture into other African countries for growth opportunities.