JOHANNESBURG, 11 SEPTEMBER 2018 – The Steel and Engineering Industries Federation of Southern Africa (SEIFSA) welcomes the third consecutive increase in output in the metals and engineering sector in July 2018, but cautions against increasing cost of inputs which have the ability to squeeze margins, constrict production and further reduce the cluster’s contribution to gross domestic product (GDP), SEIFSA Chief Economist Michael Ade said today
Speaking after the release of metals and engineering production figures, Dr Ade said although the annual growth in output is comparatively lower than that of June 2018, the data is encouraging as production is still trending positively. He said the performance in July – which officially kick-starts quarter three – w against the backdrop of generally subdued domestic demand triggered by the technical economic recession and a plummeting exchange rate is welcome.
“Given that the contribution of the broader manufacturing sector to quarter-two GDP was lower than expected, the performance by its important cluster of industries will provide more impetus for a subsequently higher manufacturing contribtion to domestic growth,” Dr Ade said.
In line with the broader manufacturing sector, which increased by 2,9% in July 2018, the latest preliminary seasonally-adjusted data released by Statistics South Africa today captures an increase in output in the M&E cluster in July 2018, when compared with July 2017. After accounting for heterogeneity through the sectoral contributionss, the data indicated that production in M&E sub-components increased by 3,4% on a year-on-year basis, and by 3,2% on a month-on-month basis.
Dr Ade said that despite welcoming the slow progression in production, SEIFSA notes that specific concerns which have the ability to inhibit the contribution of the cluster to quarter-three GDP still remain. These include high prices of both domestic and imported intermediary inputs, volatile variable costs (including fuel and energy costs) and exchange rate.
Dr Ade said although a weak exchange rate favours exports, the net effect after accounting for higher intermediate input prices can significantly offset gains from exports. He said the tumbling Rand/Dollar exchange rate, which weakened to as high as R15.24/$ today, adds to the cost of imported inputs and is generally counter productive.
“Moreover, with business confidence currently below the neutral level of 50, which is a rare and perturbing development, businesses may be compelled to pass on cost increases, thereby rendering their products less price competitive,” Dr Ade said.
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