Welcome uptick in factory and mine output

THE improvement in the key sectors of manufacturing and mining in April has raised hopes that GDP growth might have rebounded slightly from the sharp contraction SA experienced in the first quarter.

Manufacturing output rose 2.9% year on year in April, the fastest rate of growth since March 2015, according to Statistics SA on Thursday. This far exceeded the 1.3% a Reuters consensus forecast.

From February to April, manufacturing output climbed a welcome 1.1% compared to the previous quarter. The increase was also relatively broad-based, with only one out of the 10 major manufacturing sectors recording a decline. Mining production figures were also less gloomy than feared.

Although output fell 6.9% year on year in April, it was better than the consensus expectation of an 8.5% year-on-year decline. It was also the smallest contraction since January.

Taken as a three-month rate that aligns with the official GDP figures, the pace of mining’s contraction slowed from -4.8% in March to -2.4% in April.

“Output figures suggest that, after a disastrous first quarter, the economy improved a touch going into the second quarter. But the country will still struggle to avoid a technical recession,” Capital Economics’ Africa economist John Ashbourne said. The prospect that SA could be heading into a technical recession (two consecutive quarters of negative growth) increased, following the release of GDP data on Wednesday.

It showed that the economy shrank 1.2% in the first quarter relative to the previous quarter, and 0.2% year on year.

Several forward-looking indicators have been flashing warning lights, including the RMB/BER Business Confidence Index, which fell to 36 in the first quarter, its lowest level since late 2009, when the index was 28 and the country was in recession.

Stanlib chief economist Kevin Lings expressed cautious optimism that the improvement in manufacturing and mining production in April could presage a return to positive GDP growth in the second quarter, allowing SA to avoid a recession. However, he acknowledged that the tentative improvement in April’s manufacturing production, while encouraging, was not nearly enough to change the established negative trend.

“In particular, there is still no firm indication that import demand has been switched in favour of local producers as a result of rand weakness,” Lings said.

SA’s manufacturing output has declined steadily, from an average 2.3% in 2012, to 1.5% in 2013, 0.2% in 2014 and -0.02% in 2015.

The continued contraction of the mining sector also remained concerning, Ashbourne said.

“The sector is a significant employer, so its struggles will have a significant effect on labour market conditions.”

The mining sector’s GDP fell 18% quarter over quarter seasonally adjusted and annualised in the first quarter, cutting 1.5 percentage points off headline GDP.

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