Manufacturing faces hard slog to rebound

Manufacturing activity dipped again last month, suggesting the economy's second-biggest sector — seen as crucial to growth and job creation — will battle to rebound from a contraction seen over much of this year.

The Investec purchasing managers index issued on Monday slipped to 54,3 from 56,1 in October, when it recovered from September's 18-month low.

A sharp fall in new sales orders, a slowdown in activity and a decline in expected business conditions conspired to put pressure on the sector, which accounts for more than 16% of the economy.

“Manufacturing is continuing to adjust to pressure from higher interest rates, a slower global economy and strength in the rand,” said Andre Roux, head of fixed income at Investec Asset Management.

“I think we will see somewhat flat growth in the final quarter of this year after the sharp fall in the third quarter.”

Figures last week showed that manufacturing production fell 2,5% in the third quarter after slipping a revised 0,1% in the second quarter, which technically puts the sector in a recession for the first time since 2003.

The trend in Europe, SA's main trade partner, is similar. Its PMI index edged up to 52,8 after plumbing a 26-month low at 51,5 in October, while Britain's PMI index rose to 54,4 from 52,8.

The survey is compiled in many countries and is seen as a reliable barometer of manufacturing output, with a reading above 50 pointing to expansion in activity and below 50 indicating contraction.

A breakdown of SA's seasonally adjusted PMI index showed new sales orders dived to 55 from 60,3 in October, while business activity slipped to 53,7 from 54,2.

The price component fell to 70,2 from 75,8, the second decline in a row. “The strength of the rand throughout most of the month may have played a role in curbing the prices of imported inputs,” Roux said.

“However, it may also have put pressure on export performance. These factors with the effect of interest rate hikes on domestic demand ... (may) explain the decline in new sales order growth.”

The Reserve Bank is expected this week to raise interest rates for the fourth time this year, taking its key repo rate up to 11%.

That will rein in consumer demand, which is already subsiding. It may also bolster recent strength in the rand, widening its interest rate differential with other currencies and boosting its “carry trade” appeal to investors.

Gains in the rand tend to be bad for manufacturers as they erode the competitiveness of SA's exports while making imports less expensive, encouraging substitution for locally produced goods.

The volatile unit has rallied about 2,8% versus the greenback in the year to date, but has depreciated 4,2% against a trade-weighted basket of currencies monitored by the Bank.

Last month, the rand depreciated a trade-weighted 5,6% after gaining 3,8% in October, when it scaled a 17-month peak at about R6,45 to the dollar.

Figures tomorrow will show whether a fall in output in September was sustained in October. That will give clues on the sector's performance in the final quarter of this year.

Manufacturing production fell 1,4% compared with that of the same month last year, due largely to a prolonged strike in the automotive component industry.

Source: I-Net Bridge

Article via I-Net-Bridge