Strong demand aids SA factory recovery

Posted On Friday, 02 June 2006 02:00 Published by
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THE Investec Purchasing Managers Index (PMI), an important barometer of manufacturing activity, last month leapt sharply to its highest level in almost a year, in a sign that a full-blown recovery in the manufacturing sector may be under way.


Kevin O’Grady

Economics Editor

THE Investec Purchasing Managers Index (PMI), an important barometer of manufacturing activity, last month leapt sharply to its highest level in almost a year, in a sign that a full-blown recovery in the manufacturing sector may be under way.

This is crucial to overall economic growth, as the manufacturing sector is the second-largest in the economy, accounting for more than 16% of gross domestic product (GDP).

Investec Asset Management, which sponsors the index compiled by the Bureau for Economic Research at Stellenbosch University, said the PMI rose to 57,6 last month, from 54,3 in April. This was the highest level since the 60,3 recorded in July last year.

It was the third consecutive month that the PMI stayed above the level of 50, which represents the line between expansion and contraction in the sector, after dropping below 50 in January and February.

And in another significant development, the employment sub-index of the PMI rose above the 50 mark for the first time since October last year, indicating that jobs were created, rather than shed, in the sector last month.

“It is encouraging that improved conditions in the manufacturing sector are at last translating into jobs,” said André Roux, head of fixed income at Investec Asset Management.

The data builds on GDP figures released by Statistics SA this week which showed a strong rebound in the manufacturing sector in the first quarter of the year.

Stats SA says manufacturing output grew 4,3% in the first quarter, after contracting 0,3% in the final quarter of last year.

“This latest reading confirms the sector revival,” said Roux.

Although it might look as if the manufacturing sector is adjusting to the rand’s relative strength, which has hamstrung it in the past, economists said the recovery was driven mainly by strong consumer demand.

This was what drove seasonally adjusted and annualised growth in GDP higher, to 4,2% in the first quarter from 3,2% in the previous three months. This could worry the Reserve Bank’s monetary policy committee (MPC), which meets next week to decide on whether to change interest rates.

“Of concern to the Bank may be the prices component, which underpins the recent trend for higher prices, also reflected in producer inflation data,” said Nicholas Kennedy, an analyst at 4Cast in London.

The price subindex of the PMI rose sharply last month, to 68,8 from 66,9 in April, which Investec said spelt “mounting price pressure at the factory gates due to strong demand conditions, a weaker currency and higher oil prices”.

This raises the risk of a rate hike because the MPC has repeatedly expressed concern about the inflationary effect of unfettered consumer demand.

 

Weakness in the manufacturing sector was cited the last time the MPC decided to cut rates — in April last year — and signs of a strong recovery would remove any disincentive to raise rates if threats to the Bank’s inflation targets made such a move necessary.

Brait economist Colen Garrow said it would be plausible that the recovery in the manufacturing sector was the result of a muted strong-rand effect if it were not for the fact that the mining sector, which is also badly affected by rand strength, had slipped into recession.

“This suggests that manufacturers are drawing support from other sources, notably strong consumption expenditure and the positive influence a strong external environment is having on demand for local goods,” he said. With Reuters

 


Publisher: Business Day
Source: Business Day

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