FALLING PPI POINTS TO WEAK DEMAND PROSPECTS IN THE ECONOMY, SAYS SEIFSA
Johannesburg, 27 July 2017 – South Africa’s hard-pressed manufacturers are on the receiving end of the weak economy as there is little room to pass on cost increases, Steel and Engineering Industries Federation of Southern Africa (SEIFSA) Economist Marique Kruger said today.
The June 2017 Producer Price Index (PPI) for intermediate goods, released by Statistics South Africa, recorded a 2.1% increase between June 2016 and June 2017, which is down from the 3.1% year-on-year increase recorded in May 2017.
“This reflects a 4th consecutive year on year decrease, which is indicative of a lack of demand pull factors in the system. The fact is the economy is very weak and there is just not enough room for manufacturers to pass on cost increases into the market. PPI measures factory gate prices and therefore a good proxy for selling price inflation in the metals and engineering sector,” Ms Kruger said.
The metals and engineering sector made up two-thirds of the make-up of the PPI for intermediate manufactured goods, she said.
Between June 2016 and June 2017 SEIFSA’s Composite input cost index, which tracks a basket of input costs for the metals and engineering, recorded a decrease of 4.1%, she said.
“This index has exhibited a decreasing trend since the latter part of 2016, largely attributable to a relatively stronger rand during this period. Imported inputs contribute just over a third to the sectors input cost basket and as a result, a stronger rand has really helped to contain input costs for manufacturer in the sector,” she said.
Even though selling price inflation had been on the decrease in the last four months, there was a positive deferential between selling price inflation and input cost inflation, which was indicative of reduced pressure on margins, allowing companies to recoup some historic losses and repair balance sheets to an extent. The decreasing selling price limited the extent to which companies could enjoy the positive deferential, she said.
“We anticipate a narrowing in this positive deferential given the fact that the economy remains weak therefore limiting the upside prospects for selling price inflation. In addition to that, the metals and engineering sector is in the process of hopefully concluding a new wage deal soon, which will result in an increase in inputs costs. We will continue to monitor this trend.” she concluded.
Tel: (011) 298 9411 and 082 602 1725