Manufacturers prepare to take knock.

Posted On Monday, 02 June 2003 02:00 Published by
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THE WEEK AHEAD PMI declines reflect woes as rand, global issues add pressure.
THE markets are likely to take a breather this week to digest and consolidate last week's raft of economic data.

 While there is no local marketmoving data expected, there are a range of business indicators that will be closely monitored to give some indication of how business sentiment is holding up in the face of a sharply decelerating economy.

 Today, the Bureau of Economic Research at Stellenbosch University will release its monthly Purchasing Managers Index (PMI), sponsored by Investec Asset Management.

 It is likely to show a further decline as business conditions in the manufacturing sector continue to slide.

 The strong rand, high interest rates and deteriorating global economic conditions have curtailed export growth which comprises half of manufacturing production.

 The PMI in April dropped to 47,9 points below the critical 50 level that signals a contraction in the manufacturing industry. The employment sub-index also showed a significant drop in April, reflecting a possible rise in retrenchments in the industry, as firms trim costs.

 Last week's disappointing gross domestic product (GDP) figures, which showed that growth had slowed to 1,5% in the first quarter compared with 2,4% in the fourth quarter of last year, reflected the sharp slowdown in manufacturing growth. Value added by the manufacturing sector contracted by 0,3% in the first quarter after five consecutive quarters of growth, spelling bad news for employment in the formal sector, which has only recently started showing some positive signs of job growth.

 Most economists agree that government's optimistic growth forecasts of 3,3% this year will not be met, given the rand's strength and sluggish global economic growth. Some even suggest that 2% growth is too optimistic if economic conditions do not improve.

 Calls for the Reserve Bank to cut interest rates in June have intensified since the release of the GDP figures, but Friday's release of surprisingly low consumer inflation data have led most economists to believe it is now almost a certainty that the Bank will lower rates by one percentage point next month.

 The Bank's targeted inflation measure, CPIX (consumer inflation less mortgages) grew by an annual 8,5% in April compared with a revised 9,3% in March, according to data released by Statistics SA on Friday. The figures were revised downwards after Stats SA corrected an error in the rental figures, which were overestimating CPIX.

 Tomorrow's release of the monthly SA trade activity index, compiled by the Bureau of Economic Research and Standard Bank, and Wednesday's release of retail sales for March, are likely to show deteriorating consumer demand cutting into retail sales growth.

 High interest rates are one of the main reasons for the slowdown in retail sales, with sales of durable manufactured goods being adversely affected.

 Standard Bank said slower economic growth in the first quarter of this year was reflected in the growth of retail sales, with March's figure expected to fall to 2% from February's 2,6% year-on-year growth.

 "Tax relief provided by the latest budget will lift the gloom again somewhat in April's numbers," said Standard Bank.

 Slower economic growth in the first quarter also bode ill for new vehicle sales, with the latest figures due to be released tomorrow.

 Vehicle sales deteriorated by 16% in April compared with the previous month . Economists expect vehicle sales to slow during the second half of the year, then rise by year-end.

 A fall in vehicle sales may also work in consumers' favour, with dealers likely to delay price increases, helping to fuel demand for vehicles, said Standard Bank.

 However, May vehicle sales are likely to have declined, reflecting lower consumer demand.

 The SA Chamber of Business will also release its business confidence index for May on Thursday, which is expected to show a decline from its level of 106,8 in April. However, the index is backward-looking, using data that is at least a month old.

 Unlike the PMI, compiled from surveys asking purchasing managers about the business decisions they may make in the future, the Sacob index reflects business conditions as they are.

Publisher: Business Day
Source: Business Day

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