Johannesburg, 31 August 2017 – The 1.5% annual decrease in the Producer Price Index (PPI) for intermediate manufactured goods in July 2017 does not augur well for producers in an economy stuck in low growth and generally rising input costs, Steel and Engineering Industries Federation of Southern Africa (SEIFSA) Economist Marique Kruger said today.
This reflects a fifth consecutive year-on-year decrease, which is indicative of prolonged subdued domestic demand. From June 2017 to July 2017, the PPI for intermediate manufactured goods decreased by 0.9%.
Ms Kruger said the 1.5% decrease in the PPI for intermediate manufactured goods left no leeway for manufacturers to pass cost increases onto the market.
“On an annual basis, SEIFSA’s composite input cost index, which tracks the average costs structure for the metals and engineering (M&E) sector, recorded a -1% decrease in July 2017, largely due to a stronger rand which has helped mitigate costs. Although the index depicts a decreasing input costs scenario, the rate of decrease was better than the annual figure previously recorded (-4.1) in June 2017, despite the weak economy and additional costs incurred from the conclusion of a new wage deal by the metals and engineering sector,” she said.
“Even though currently the differential between the selling price and input cost remains positive, the gap is decreasing as the volatile rand and structural rigidities prevent local companies from benefiting from low international commodity prices,” she added.
Despite South Africa’s junk credit status, the rand has been stronger against most currencies over the past two months compared with a year ago, she said. Ms Kruger said the exchange rate effect on prices appears to be diminishing and that this would be beneficial for inflation, input costs and margins of companies in the sector.
Ms Kruger said she expected a positive trade balance for July 2017 on the back of a good month in June 2017.
“A positive trade balance augurs well for exports and generally provides clues on the health of the manufacturing sector. This, together with the anticipated increase in domestic demand from the current expansionary monetary policy stance, provides hope for a reversal in the fortunes of the M&E sector in particular.
“We are hopeful that the next release of the PPI for intermediate manufactured goods will be more encouraging, since the lag effects of increased domestic demand starts filtering through. We will continually monitor the trend,” Ms Kruger concluded.
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