Expected business conditions over the next 12 months have deteriorated, the allimportant business activity sub-index of the purchasing managers’ index declined in August and the Bureau for Economic Research’s overall business confidence index showed that sales of intermediary goods (chemicals, basic metals and metal products) and capital goods (transport and machinery and equipment) contracted in the third quarter.
“The fact that interest rates were kept unchanged means that the strain taken by metals and engineering companies to service their debts will not be exacerbated. The latter finally triggered the spate of retrenchment announcements in the sector, after profit margins have been under pressure since 2008,” Mr Langenhoven said.
He said that the fact that producer price index (PPI) numbers for intermediate manufactured goods released today showed a continued deflationary trend, recording – 0.4% when August 2015 is compared to August 2014 (down from the -0.3% recorded in July 2014), supported the MPC’s decision.
“This is very positive for the pass-through of price increase from the intermediate PPI to the final PPI and, finally, into consumer prices. It is, therefore, not contributing to the MPC concerns about future inflation. Unfortunately, it is also further evidence of the very weak domestic demand situation for the sector,” Mr Langenhoven said.
The metals and engineering sector depends on the international market for sales, and the Governor confirmed concerns about the weak and uncertain international economic recovery. The MPC decision brings South Africa in line with other commodity-dependent economies which are either lowering their interest rates or keeping them stable.
Mr Langenhoven said that today’s MPC decision is supportive of the weak domestic economy. Although the auto sector is also dependent on exports, a stable interest rate may support domestic car sales.
“The Governor revealed that domestic fixed investment (which includes construction sector activity) has slowed down. This is not good news at all. However, a stable interest rate may support a fledgling recovery in the residential construction market.
Mining companies under similar financing strain as those in the metals and engineering sector may also benefit from today’s decision,” Mr Langenhoven concluded.