Kevin O'Grady

Economics Editor

THE manufacturing sector received some respite from the ravages of the rand last month, as expansion in the sector resumed, thanks to strong consumer demand.

The Investec Purchasing Managers Index (PMI) rebounded back above the crucial 50 level after dropping below it for the first time in 15 months in January.

A score above 50 indicates expansion, while a drop below that level points to a contraction.

The manufacturing sector contributes 16% to the gross domestic product (GDP) and has been devastated in recent years by the rand’s rise against the dollar, which has eroded the competitiveness of the export sector.

This has led to concerns about the "deindustrialisation" of the economy. Without significant growth in industry, SA’s chances of significantly cutting unemployment are reduced.

Andre Roux, head of fixed income at Investec Asset Management, said the jump in the seasonally adjusted PMI from 49,3 in January to 54,2 showed that "manufacturing activity is expanding again".

"While the strength of the currency is likely to continue to place a damper on the growth of the sector, the latest reading offers some consolation," Roux said.

There was a "particularly strong" improvement in business activity and new sales orders, Roux said. Purchasing inventories and purchasing commitments also increased "meaningfully", but would need to be sustained to signify a more robust outlook for the sector.

The sector is continuing to shed jobs, although at a slower pace, with the employment index in the PMI increasing from 47,7 in January to 48,9 in February.

The last time this sub-index moved above 50, which points to the creation of jobs, was in September last year.

The PMI is an index of activity in the manufacturing sector based on a survey by Stellenbosch University’s Bureau for Economic Research and the Institute of Purchasing Managers in SA. Its worst run to date was between March and October 2003, when it edged above the 50 level only once.

The adversity facing the manufacturing sector is one of the arguments put forward by analysts in favour of a further cut in interest rates — the thinking being that a looser monetary policy would weaken the rand and give manufacturing back some edge.

According to the latest GDP figures, growth in manufacturing slowed to an annualised 2,5% in the fourth quarter of last year, from 6,3% in the third.

Last month’s improvement in the PMI could be a sign that manufacturers are adjusting to a rand that has doubled in value against the dollar since the end of 2001.

Brait economist Colen Garrow said yesterday that the latest PMI reading "must be a vindication for the Reserve Bank, which faced criticism last month that rates needed to be trimmed urgently to avert a continuation of the soft patch in the manufacturing sector".