Kevin O’Grady and Ayanda Shezi

THE manufacturing sector has failed to live up to expectations of a strong recovery — output grew just 2,4% year on year in July, despite the sector looking full of promise in a recent survey.

Figures released by Statistics SA yesterday show the annual rate of growth unchanged from June, with a slight uptick of 0,4% month on month, seasonally adjusted.

The slow rate of growth in the manufacturing sector surprised analysts after a jump in the Bureau for Economic Research’s purchasing managers index (PMI) in July to a record 61,7.

Standard Bank economist Rashika Lalla said this had created the expectation of healthier growth in the manufacturing sector, because the PMI is generally an accurate leading indicator of manufacturing activity.

The strong rand continues to be the main culprit in the sector’s sluggish performance, undermining the competitiveness of exports, which account for 20% of goods manufactured in SA.

As manufacturing is the second-largest sector of the economy, making up more than 16% of gross domestic product (GDP), the sector’s slow rate of expansion raises questions about how government will achieve its aim of sustained GDP growth of 6% in the absence of a strategy to significantly boost exports.

This may be the focus of a government task team, headed by Deputy President Phumzile Mlambo-Ngcuka, which is examining ways of achieving the 6% growth target and is expected to report its findings in less than a month.

But an export-driven growth strategy will have to overcome the twin hurdles of a strong rand and record high oil prices, which will curb economic growth, and hence demand, in SA’s main trading partners.

Lalla said: "A spike in oil prices to more than $50 a barrel late last year underpinned slow growth performance in the European Union (EU). Thus, the recent spike is likely to have a similar impact on the EU’s growth outlook in the months ahead."

Analysts said the sector could also not continue to rely on robust domestic demand for growth because of the slowdown evident in retail sales figures released by Statistics SA this week.

Any tightening of domestic monetary policy, which some analysts see as likely as inflation climbs because of soaring oil prices, will dampen local demand even further.

"Heavily restricted by the strong rand, the manufacturing sector has been dependent on domestic demand for growth. However, softer growth in retail activity has indicated that consumer demand growth may be slowing," Lalla said.

Oil prices and higher inflation are the main concerns of economists surveyed for the monthly Reuters Econometer, which was released yesterday.

It shows declining economic confidence, mainly on the expectation of the higher interest rates that could accompany higher inflation.

The Econometer dropped to 262,26 last month, from a record high of 270,32 in July. Oil prices, which reached above $70 a barrel last week after Hurricane Katrina hit the US, were seen as the biggest threat to the Reserve Bank’s inflation outlook.