Economic Update

27 Sep, 2016

Stronger performance in the manufacturing industry helped keep South Africa’s economy out of a recession, and has led to a slight upward revision in annual growth forecasts.

Increased manufacturing output

Production in South Africa’s manufacturing industry was up 4.7% year-on-year (y-o-y) in June – marking the third consecutive month that annualised production figures increased, according to data released by Statistics South Africa (Stats SA).

The sector’s results were well above the 3.1% y-o-y market expectation for June, predicted by a Nedbank survey of economists, and marked the highest level of growth recorded since July of last year.

Moreover, increased production in June was not driven by significant progress in one or two key segments, but by broad gains across most of the manufacturing sector, with eight of the 10 divisions covered in the survey reporting positive growth.

Expansion was underpinned by, among others, higher output in petroleum, chemical products, rubber and plastic products (15.4%); wood and wood products, paper, publishing and printing (4.4%); and food and beverages (2%), according to preliminary Stats SA data.

Although manufacturing growth eased to 0.4% y-o-y in July when taking into account seasonally adjusted figures, manufacturing production was up 1.7% in the three-month period to end July.

Slower decline in mining

The improved performance helped alleviate the slowdown in other areas of the economy, including South Africa’s mining sector, which in June saw production decreasing 3% y-o-y, according to another report issued by Stats SA.

However, the June result was by far the most modest decline this year, indicating that the slowdown was less severe than expected – a Reuters poll forecast a 4% contraction, for example. Equally importantly, seasonally adjusted data for the three-month period through to end July showed 4.25% growth, with platinum group metals and iron ore as the primary contributors.

Although key mining segments posted negative contributions – with manganese ore, diamond, nickel, copper and other non-metallic minerals all seeing double-digit declines in output – some of the downturn was offset by stronger coal production and platinum group metals also recording gains.

However, the sector is not out of the woods just yet, with a more pronounced decline in production in July, at 5.4% y-o-y.

Recession avoided

With manufacturing and mining together accounting for 20% of the country’s GDP, the spring and summer performance thus far – with June’s results coming on the back of improved results in the preceding two months – pushed the economy into positive territory, at 3.3% quarter-on-quarter (q-o-q) in the second quarter, offsetting the 1.2% q-o-q negative growth seen in the first quarter of the year.

The positive results led to an upward adjustment in growth forecasts. In September Lesetja Kganyago, governor of the South African Reserve Bank, announced that the bank had revised its growth predictions from zero to 0.4% for the year due to a “higher starting point”, with predictions of 1.2% and 1.6% for 2017 and 2018, respectively.

Despite the recent rally, however, economic growth remains muted going into the third quarter.

“While the second quarter growth performance was more favourable, data from July suggest that this improvement is unlikely to be sustained for the third quarter,” Kganyago told media.

Strikes threaten recovery

One factor that could erode gains in the manufacturing sector in the third quarter is an increase in industrial action, with recent strikes in some key industries over higher wage demands.

Industrial action against public utility company Eskom – which supplies power to industrial plants – and strikes in the petroleum sector, could both weaken manufacturing output and slow the pace of broader economic recovery.

In early August members of the 15,000-strong National Union of Mineworkers (NUM) went on strike after Eskom did not mean their salary demands. While employees sought between a 12% to 13% wage increase depending on pay level, Eskom offered 7%, according to press reports.

However, on August 10 Eskom received a court order against the strike, and later reached a wage agreement with members of the NUM, with the expectation that operations would soon return to normal.

Meanwhile, in late July the Chemical Energy Paper Printing Wood and Allied Workers Union called for a fuel strike after the National Petroleum Employers’ Association denied requests for a salary increase.

The South African Petroleum Industry Association has confirmed that there is sufficient supply to meet demand; however, according to press reports, the South African Chamber of Commerce and Industry (SACCI) has noted the potential economic impacts of the strike.

“The strike will impact negatively on the economy in general,” according to a statement by SACCI. “Businesses are mostly affected by the disruptions in the logistics value chain which is a critical component to many business operations.

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