CAPE TOWN Fixed investment in manufacturing plant continues to improve, indicating the sector is maintaining its recent growth trend despite a slowing in sales, orders and production volumes in the first quarter of this year.

According to the latest Bureau for Economic Research (BER) manufacturing survey, respondents indicated a slowdown in domestic and export activity in the first quarter, intensifying the trend that became evident late last year.

BER senior economic Pieter Laubscher said there were three broad reasons retail demand stalling owing to the delayed effect of higher interest rates and inflation; poor global economic growth was putting pressure on exports; and the stronger rand had reversed the trend towards import substitution that stimulated domestic demand when the rand weakened the year before last.

The more difficult environment weakened the manufacturing business confidence index to 57 index points from 61 in the fourth quarter of last year. That this was still above 50 indicated the majority of respondents continued to report satisfactory business conditions.

Slower production conditions resulted in factory employment cutbacks as well as shorter factory working hours, but it was hoped that this was a temporary phenomenon. The stronger rand was helping to bring down costs of raw materials while unit labour costs were lagging inflation. With unit costs declining sharply, selling prices were also falling.

Laubscher said this was a strong indication that producer price inflation, at 6,2% in February, was likely to decelerate further in the coming months.

Overall, the results indicated significantly weaker manufacturing activity in the first half of the year compared with mid-2002. There could be improvement in the second half if world economic recovery was sustained and with declining domestic interest rates after June, deceleration in inflation and personal tax cuts.

Laubscher said the increase in fixed investment did not reflect the stronger rand's effect on imported capital equipment. It was a continuation of a longerterm trend reflecting underlying improvement in the sector. Businesses were experiencing capacity constraints, which were encouraging upgrades of facilities, purchase of the latest technology and expansion of production capacity.

Trade and industry department chief economist Dave Kaplan said a longerterm structural change in the manufacturing sector had occurred. Productivity had improved and the sector had become more efficient and competitive.
Apr 11 2003 07:09:35:000AM  Charlotte Mathews Business Day 1st Edition