Manufacturing growth slumps to 18-month low 
Ayanda Shezi

Economics Correspondent

MANUFACTURING production growth slowed dramatically in October, falling to 18-month lows as the rand strengthened and global demand slowed. If the rand continues its strong performance, and positive developments in oil prices continue, analysts said the Bank may even cut interest rates early next year in an attempt to aid the economy’s second-largest sector.

Oil prices have not risen as strongly as expected amid the northern hemisphere’s winter season.

Figures released yesterday by Statistics SA show that output in the manufacturing sector, which contributes 16% to gross domestic product (GDP), fell 4,9% in the month.

Growth slowed to 0,3% year on year in October, from a revised 5,6% in September.

“We remain of the opinion that the next move in interest rates could be lower as soon as the first half (of next year),” Kagiso Securities economist Elize Kruger said yesterday.

Earlier this year the Bank trimmed interest rates 50 basis points after noting “with concern, evidence of some slackening in activity in some sectors of the economy”, as a result of a stronger rand. This resulted in a turnaround in the sector’s fortunes, and in the second quarter of this year, manufacturing grew 7,9%. However, in the third quarter, it slowed to 5,6%, dragging down overall GDP to 4,2% (5,4%).

Following the latest Investec Purchasing Managers Index (PMI) figures, a leading indicator of manufacturing activity, the outlook for the manufacturing sector remains bearish, at least in the short term.

PMI declined to 50 index points last month, making it the fourth consecutive month it has declined.

“October’s disappointing numbers may signal the start of more general weakness in the manufacturing sector,” said Nedbank chief economist Denis Dykes. He said that the number was unlikely to change the outcome of the monetary policy committee (MPC) meeting currently under way, but would help reinforce arguments to keep interest rates steady.

“If further weakness develops it could, however, start to weigh more heavily on future MPC decisions,” said Dykes.

Some industries within the sector would benefit from the anticipated strength in domesticspending and planned acceleration in infrastructure spending, Dykes said, while others were expected to take strain from a relatively firm rand and softer global growth

Meanwhile, the Bank failed to take advantage of a strong rand last month, accumulating reserves only moderately, despite the local currency being 3,2% stronger at the end of last month, compared with the same period in October.

Recent rand strength at below R6,30 to the dollar could trigger more aggressive accumulation in coming months.

The rand has benefited from precious metals prices racing to multi-year highs over the past few days.

Gold and platinum account for about 20% of South African exports.

Gold was quoted at $514,90/oz on the JSE yesterday, while platinum was changing hands at $998/oz.

The Bank increased gross reserves to $19,9bn last month, from $19,7bn in October. Foreign exchange reserves increased $125m to $17,9bn ($17,8bn). Because of the higher gold price of $494,8/oz ($471,9/oz), gold reserves surged to $1,97bn, from $1,88bn in October.

Gold reserves are expected to rise in December as the gold price has since increased above $500/oz.

Standard Bank economist Shireen Darmalingam said reserves were edging closer to $20bn, which may be perceived as an optimal level for SA. SA, however, still lags behind some developing countries — China has reserves of $609bn, while India’s amount to $135,3bn.