Ayanda Shezi

Economics Correspondent

MANUFACTURING activity contracted for the second consecutive month last month and, if sustained, could dent SA’s economic growth prospects.

The manufacturing sector, the economy’s second-largest and accounting for around 16% of gross domestic product (GDP), has been hammered by a rand trading close to R6 to the US dollar in the past two months — and the sector’s woes are set to continue, analysts said yesterday.

SA’s growth has largely been carried by strong consumer demand over the past six quarters.

"We anticipate that consumption demand should slow down as runaway credit extension and money supply come down to more sustainable levels and banks begin to tighten their lending criteria in order to limit the fallout from the credit binge," said Argon Asset Management portfolio manager Nazeem Hendricks.

"If manufacturing activity does not come to the party, then growth expectations will have to be moderated," he said.

Economic growth disappointed in the fourth quarter of last year, slowing to 3,3%, from 4,2% in the third quarter, bringing last year’s growth rate to 4,9%.

Figures released yesterday show that the Investec purchasing managers’ index (PMI) was at 49 last month, slightly up from 48,1 in January.

A reading below 50 suggests a contraction in the sector.

"This confirms that manufacturing conditions are under pressure. The sustained strength of the rand probably explains much of the pressure on manufacturing," said Investec Asset Management’s head of fixed income, Andre Roux, yesterday.

In January, the PMI dropped below 50 points for the first time since October 2003, as exporters were thrown off balance by the strength in the rand. Last month, the currency averaged R6,09 to the dollar.

Data from Statistics SA released last month showed that manufacturing production rose to its highest level in eight months during December, but the manufacturing sector is likely to remain under pressure in the coming months as the rand remains resilient. The currency has benefited from strong precious metals prices and positive sentiment towards the economy.

With the gold price set to increase during the year, possibly reaching $600/oz, the rand could strengthen further.

A weaker global economy, stubbornly high oil prices and relatively high interest rates have also affected demand for the country’s exports. The contraction in output was also affecting factory employment, Roux said, with the seasonally adjusted employment index at 45,8, down from 46,7 in January.

"Labour shedding is continuing in the manufacturing sector," Roux said.

All the components of the PMI slowed moderately.

"The silver lining is that it appears as though new orders are rising, leading to a reduction in inventories, which should support increasing activity," Hendricks said.