Johannesburg, 9 November 2017 – The latest preliminary production data for the metals and engineering (M&E) sector released by Statistics South Africa today reflects a reduction in production, in line with the broader manufacturing sector, observed Steel and Engineering Industries of Southern Africa (SEIFSA) Chief Economist Michael Ade.
He said that, despite a favourable global growth outlook, constrained domestic conditions have not helped sustain the recent upswing in the M&E production recorded in August 2017. He said this meant that producers are now likely to end the year on a negative note.
The Statistics South Africa data revealed that production in the M&E sector decreased by 6.3% in September 2017 on a year-on-year basis, compared to the 10.7% year on year recorded in August 2017. On a month-on-month basis, the M&E sector also performed poorly, recording 3.1% growth in September 2017 (compared to 4.3% in August 2017).
Dr Ade said the poor performance of the M&E sector is consistent with the annual decrease in production recorded (1.6%) in the broader manufacturing sector in September 2017, compared to 1.5% recorded in August 2017.
He said the decrease in the broader manufacturing production data (coupled with the year-on-year decrease in mining production of 0.9% in September 2017) is expected to impact negatively on the industrial production index for September 2017, given the subdued economic conditions.
“This is bad news, given that the industrial production index performed better in August, in line with world trends, largely supported by the resilient manufacturing and utilities sectors,” Dr Ade said.
He added that the industrial production index for South Africa in August 2017 was 1.4%, closer to that of advanced economies like Britain (1.6%) and the United States (1.6%). However, the industrial production indices for all other comparator countries (except for Russia) such as Brazil, Russia, India and China– which together with South Africa are commonly known as BRICS – trended higher at 4.0%, than that of SA.
“The current manufacturing production data have diminished prospects for a further improvement in domestic industrial production in the short term, in an environment characterised by subdued economic growth,” Dr Ade said.
He added that the performance of key economic indicators for the M&E sector such as the Producer Price Index (PPI) for intermediate manufactured goods and the Purchasing Management Index (PMI), are also crucial in bolstering margins and supporting further growth prospects in the sector.
“Despite the consecutive increases of three sub-indices of the PMI survey (namely the business activity, the inventory levels and new orders sub-indices) from July 2017 to September 2017, the growth in output is still inconsistent” he said.
“The generally difficult domestic business conditions, characterised by low gross fixed capital formation, have rendered the M&E sector unattractive, and this partly explains the volatility. However, the expectation is for the volatility in output in the broader manufacturing sector and specifically the M&E sub-component to stabilise by the end of the year, barring any mild negative shock to the economy,” Dr Ade said.
He said much would hinge on the outcomes of the international ratings agencies’ decisions in November 2017, pronouncing on South Africa’s credit ratings and the ANC’s elective conference in December 2017.
He said the Federation will continue to track the M&E production data, including all dynamics which may impact on the data, and expressed the hope that the October 2017 manufacturing production and sales data will be positive.
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