‘Shocking’ fall in factory output raises fears over exports

FMCG SUPPLIER NEWS

Business Day - May 11th 2012, 08:20

Manufacturing output contracted unexpectedly in March, suggesting that the recession in Europe is already taking a toll on exports and signalling growth in the economy may be slowing more sharply than expected.
 

Factory production fell by 2,7% year on year, marking the first decline in eight months, data from Statistics SA showed yesterday. Output fell by 4,3% in the month itself, with contractions across a broad range of industries.

"These are shocking numbers and difficult to explain," Stanlib economist Kevin Lings said yesterday.

Manufacturing last contracted in July last year, when output was severely hit by strikes.

Mining production also continued to fall during March, sliding by 9,8% year on year after a revised 13,4% drop in February, Statistics SA said.

Manufacturing and mining together account for a fifth of the economy and 15% of formal employment.

The figures highlight the urgency of implementing plans by the Department of Trade and Industry to spend R5,8bn over the next three years to help manufacturers, who are under pressure from a global slowdown.

"This is not good," Meganomics economist Colen Garrow said yesterday. "Growth forecasts for this year will have to be revised down as manufacturing is sliding back into the doldrums and mining is going the same way."

Consensus forecasts predict the economy will expand by 2,8% this year after growth of 3,1% last year. Mr Garrow said growth would slow to just 2,6% this year.

Production of motor vehicles, food and beverages, basic iron and steel, petroleum and chemical products, and furniture all fell during the month, the data showed.

"I’m not surprised," Stewart Jennings, chairman of the Manufacturing Circle, said yesterday.

"The economy is much weaker than we thought. Volumes are down and there is tremendous margin pressure."

Mr Jennings said the sector, which is the economy’s second biggest, had been hit by the onset of a recession in Europe and strength in the rand during the first quarter of this year.

Europe is SA’s main trade partner, taking a third of its manufactured exports. A strong rand erodes the competitiveness of local exports and encourages import substitution.

"Manufacturing has to be export-led, the domestic economy is too small to depend on," Mr Jennings said.

"I think we have to batten down the hatches and continue to drive efficiencies — unfortunately that doesn’t augur well for employment and investment."

The manufacturing figures are in step with news earlier this week that the sector shed 67000 jobs during the first quarter.

But they are puzzling in the context of SA’s purchasing managers index (PMI) for March, which gave a reading that pointed to slower growth in production rather than an outright fall.

Mr Lings said it was too soon to read too much into the figures, which tended to be volatile.

Nonetheless, there was widespread agreement that the manufacturing sector faced heavy pressure this year, given both the global economic slowdown and an expected weakening in domestic demand.

The outlook for Europe this year is grim, amid rising popular opposition to austerity measures aimed at resolving the region’s sovereign debt crisis.

Fallout from Europe’s problems, as well as a slowdown in China, will affect the health of the global economy.

SA’s PMI for last month dipped for the second month in a row, although it remained above the neutral level that marks the cutoff between expansion and contraction.

"The outlook for the remainder of 2012 remains subdued," Nedbank economist Nicky Weimar said yesterday. She said the sector also faced structural challenges that would hamper competitiveness and performance over the longer term.

These included higher production costs triggered by rising electricity prices, high labour costs, declining productivity, skills constraints and high compliance costs. Insufficient and expensive transport and logistical infrastructure was also an issue, she noted.

The rand has weakened sharply so far this month and Mr Jennings said if it continued to depreciate, local exporters would benefit. It was trading near R8/$1 yesterday, compared with R7,67/$1 at the end of March.