Kevin O’Grady

Economics Editor

HOPES for a recovery in the rand-battered manufacturing sector grew yesterday as the Investec Purchasing Managers Index (PMI) soared to a record 61,7.

The latest reading of the PMI, which is the main index of activity in the all-important manufacturing sector, sparked renewed optimism about economic growth, which government has been struggling to get near its goal of 6% a year — the level viewed as necessary for job creation.

Despite impressive growth in gross domestic product (GDP) of 3,7% last year, job creation has been sluggish because growth has been consumer-led, thanks to the lowest interest rates in 25 years, rather than driven by expansion in the production side of the economy.

Economists said yesterday that although it was too soon to predict a sustained revival of manufacturing, it was clear the sector was responding well to recent rand weakness and stronger domestic and global demand.

The sector, which accounts for 16% of GDP, has been in the doldrums of late, partly because of the rand’s phenomenal rise against the dollar since 2002, which has made imported goods cheaper but eaten into export revenues.

However, the rand has depreciated nearly 14% this year — much of it after the Reserve Bank announced a surprise 50-basis-point cut in interest rates in April, citing a worrying slackening of activity in manufacturing.

Andre Roux, Investec Asset Management’s head of fixed income, said the PMI rose from an "already high" 59,8 in June to set a new record of 61,7 last month, a remarkable comeback from January, when it dipped below the crucial 50 level for the first time since October 2003.

The previous record of 60,3 was set in April 2002.

Roux said the sharp increase in the index, which is conducted by the Bureau for Economic Research at Stellenbosch University, "may be linked to the more competitive level of the currency and a revival in global growth".

"There are also signs of a bottoming out in the adverse export situation," Roux said.

The increase was driven by a strong showing in two of the PMI’s eight subindices — those measuring business activity and new sales orders.

But Roux warned against reading too much into the results, saying they "need to be followed up by more readings at these high levels to confirm a recovery in manufacturing conditions".

Economists said if the PMI reading was confirmed in next week’s manufacturing production figures for June from Statistics SA — the release of which coincides with a meeting of the Reserve Bank’s monetary policy committee — it might become clearer that a recovery is under way. Signs of a recovery in manufacturing should result in no change in interest rates, they said.

"The Bank does not need to jump-start any part of the economy, with the PMI indicating that manufacturing will be turning up in the near future, and consumer demand remaining strong," said Merrill Lynch economists.

JP Morgan economist Marisa Fassler said a strong manufacturing outcome for June should support the case for interest rates to remain unchanged, but weak numbers could favour another cut. With Bloomberg