Recovery still at risk as factory output stutters

Category: Business News

Date Added: 12 March 2010

MARIAM ISA

Economics Editor

FACTORY output was disappointing in January, casting doubt over the sustainability of SA’s economic recovery, which has so far been driven by manufacturing.

Production rose 3,7% compared with the year-earlier month — well below forecasts for a 5,5% hike, official data showed yesterday. In the month itself, factory output fell 0,6%.

“This would have taken many by surprise,” said Standard Chartered’s regional research head for Africa, Razia Khan.

“The disappointment … will serve as a reminder of the challenges still faced by manufacturing on a structural basis.”

These included the strength of the rand, higher electricity prices and declining competitiveness, with labour relatively expensive and skills not improving as swiftly as required, she said.

But mining output rose for the first time in six months during January, buoyed by global demand for commodities, data from Statistics SA showed yesterday. Mining accounts for about 5% of overall output, while manufacturing, at about 15%, is much more important in terms of job creation and growth.

The sector is the economy’s second biggest, and has been the

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main driver of the recovery from recession. But the rebound has been spurred largely by global demand for local exports and rebuilding of inventories, rather than consumer spending, which remains the economy’s biggest growth engine.

Nonetheless yesterday’s data were not completely discouraging.

Factory output rose 3,2% in the year to December, so the January rise was still an improvement, albeit well short of expectations.

In the three months to end- January, manufacturing output rose a healthy 4,1% — above the 3,4% revised quarterly rise in December.

In that period, activity climbed in eight of 10 industries, led by a 17,1% quarterly rise in vehicle production, a 5,5% increase in iron and steel.

“Looking at the three-month rate of change, manufacturing activity appears to be exiting the recession,” Stanlib economist Kevin Lings said. But the improvement remained a “little fragile” given that consumer demand was still under pressure, while inventory adjustments provided a temporary uplift, he said.

Last year, SA’s manufacturing output plunged a record 12,3%.

But a key industry survey, the purchasing managers’ index sponsored by Kagiso Securities, has signalled a steady revival since November last year.

Last month the index rocketed to 60,4 from 53,6 — well above expectations and its highest since March 2007. That suggests factory output rose more strongly last month, and is set to climb further over the rest of this year.

Mining output surged 7,7% in January compared with a year earlier. Stats SA said it was the first year-on-year gain since July.

Iron ore climbed 24%, platinum group metals 17% and diamond production surged a staggering 59% as mines reopened. But gold output dived by 18%.

“The improved numbers coming out of the mining sector add credence to our view that the recovery in the supply side of the economy is looking strong,” Absa Capital said.

It said economic growth would quicken to 4% in the first quarter of this year, from 3,2% in the final three months of last year.

Nonetheless, most analysts are convinced the Reserve Bank will keep interest rates steady at its policy meeting later this month.

“Actual activity levels are still relatively low and the recovery is still vulnerable to setbacks,” Nedbank economist Johannes Khosa said.

“We still expect the MPC (monetary policy committee) to keep rates on hold throughout 2010 even as inflation edges higher this year.” The committee meets on March 24-25.

isam@bdfm.co.za

Source: Business Day