Economics Correspondent
THE recession in the manufacturing sector deepened for a third quarter, but showed a slight improvement in June, according to figures released yesterday by Statistics SA.
Production volumes dropped 2,2% year on year in June, compared with a 4% decline in May and a 4,9% drop in April.
However, manufacturing production remains quite weak still, as high interest rates last year, the strong rand and weak global demand eroded growth .
On a seasonally adjusted annualised basis, manufacturing production has had three consecutive quarters of negative growth contracting 4,5% in the fourth quarter last year, followed by a 7,1% decline in the first quarter and a 5,3% contraction in the second quarter.
Sanlam Investment Management economist Christian Prins said that the stronger rand, in addition to reducing the competitiveness of the export sector, was putting pressure on manufacturing industries that were competing with cheaper imports.
He said consumer demand remained relatively strong, as reflected by buoyant growth in retail sales, while manufacturing production had weakened considerably, indicating that imports were meeting the demand .
According to Stats SA, some of the main contributors to the drop in production in the second quarter were a decline in the food, textile, clothing, wood and basic iron and steel industries.
Prins said high interest rates, the strong rand and weak global demand were "not an environment where the manufacturing sector can flourish".
With the sector being the largest employer in the economy and some of the sectors, such as textiles, being labour intensive, Prins said the contraction in the industry "definitely puts a strain on job growth".
Standard Bank economist Njabulo Sithebe said the slump in production put pressure on fixed investment in the sector, which slowed production further.
"The problem with negative growth in production is that as profit expectations fall, there will be a decline in investment spending, because of pressures on profit margins, as manufacturers pause to do market analysis."
However, prospects for growth in the sector by the end of the year have improved, with lower interest rates and growing global demand expected to give a boost to the sector, economists said.
The Investec purchasing managers index (PMI), which measures business activity in the manufacturing sector, increased sharply last month , rising slightly above the critical 50 level, signalling the sector was expanding.
"Things are looking better, with the PMI signalling a turnaround and lower interest rates still to come. The exportoriented manufacturing sectors are showing more improvement than the import-competing industries," said Prins.
Inventories are also being drawn down at the moment, but once they reach low levels, production will rise to replenish stock levels .
Sithebe said the latest export figures showed a rise in categories that contributed to the decline in the second-quarter manufacturing data, such as food products, textiles and iron and steel.
"This suggests that we are likely to see an improvement in the third quarter. The rate of decrease will decelerate even further, with the possibility of positive growth," says Sithebe.
Aug 13 2003 07:50:27:000AM Nasreen Seria Business Day 1st Edition
Publisher: Business Day
Source: Business Day
Improvement in June offers manufacturing sector hope.
Posted On Wednesday, 13 August 2003 02:00 Published by eProperty News
Recession continues for third successive quarter, mainly because of cheaper imports, but growth prospects are good.
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