JOHANNESBURG, 5 MAY 2018 – Despite the positive shift in political will, improved consumer and business confidence and generally lower inflation in the first quarter of 2018 when compared to 2017, domestic demand has yet to catch up with improving sentiments as evidenced by the decrease in real gross domestic product (GDP) in quarter one of 2018, the Steel and Engineering Industries Federation of Southern Africa (SEIFSA) said today.
“This is indicative of economic drag characterised by a less-than-expected increase in consumer spending, high unemployment and low investment,” said SEIFSA Chief Economist Michael Ade.
“As unemployment rises, middle-class income stagnates or even declines, reducing the pool of buyers for goods produced by business, which leads to reduced business investment,” he said.
South Africa’s real GDP contracted by 2,2% in the first quarter of 2018, down from a revised 3,1% quarter-on-quarter (q/q) increase recorded in quarter four of 2017. The manufacturing sector was amongst the largest negative contributors, decreasing by 6,4%.
Dr Ade said that the poor GDP figures are underpinned by poor performance of high- frequency data, including the manufacturing purchasing managers index (PMI) and mining data in relative terms.
“Although production costs in the first quarter of 2018 were lower than in the same period in 2017, prevailing subdued domestic demand, lack of new markets and low export volumes and reduced exports market share constrained companies from benefitting from a comparatively lower trending cost curves,” Dr Ade said.
He added that companies in the broader manufacturing sector and its M&E cluster were expected to benefit from lower-trending domestic production costs as captured by both the producers price indices (PPI) for final and intermediate manufactured goods improve on output and result in better margins.
“However, the PPI also measures selling price inflation and its performance in quarter one of 2018, relative to quarter four of 2017, constrained companies from invariably increasing selling prices. The constraint on increasing selling prices, together with lower output in the M&E cluster, negatively impacted on firms’ total revenue, while also negatively affecting profitability, thus leading to a vicious cycle,” he said.
Dr Ade also cautioned on supply-side concerns that could slow quarter two growth in 2018 and further impede the expansion of the M&E sub-component in the short term. He cited the impact of the steel and aluminium imports tariffs imposed by the US on South Africa amongst other countries, effective June 1, and the second-round effects of an impending increase in fuel prices which may lead to higher transportation costs for businesses.
“Slowly rising variable costs in the broader manufacturing sector and the M&E cluster in particular are also indicative of gradually increasing output levels, given the close positive correlation between the two variables. Although manufacturing production levels increased in the first two months of quarter one of 2018 and decreased in the last month, the expectation is for a better performance in quarter two of 2018. This is necessary, given the importance of the manufacturing sector – including its M&E sub-cluster – in boosting local jobs and economic growth,” Dr Ade said.
Issued by:
Ollie Madlala
Communications Consultant
Tel: (011) 298 9411 / 082 602 1725
Email: ollie@seifsa.co.za
Web: www.seifsa.co.za