Factories Falter After a Brief 'Bounce'

FACTORY output faltered in July, with annual growth in the economy's second-biggest sector slowing to 3,3% in the face of waning local and global demand and rising input costs, official data showed yesterday.

Mining production plunged 13% in the same month but this was due mainly to deferred maintenance among platinum producers, Statistics SA said.

The data supported the view that a strong second-quarter rebound for the two sectors, which together account for 21% of the economy, stemmed mainly from restored power supply and may be short-lived.

They also backed the message of a survey showing that confidence in the manufacturing sector, which provides 14% of formal employment, dived to a nine-year low in the third quarter.

Goldman Sachs economist Ashok Bhundia said factory output, which rose by a revised 5,7% in June, might contract in the third quarter. A recovery in the sector in the longer term would depend largely on external demand conditions, he said.

Manufacturing has been hit by the triple whammy of rising domestic interest rates, which have curbed consumer demand, global economic slowdown and soaring inflation.

That two of SA's main trade partners, the UK and Europe, face recession this year does not bode well for factory exports, despite a sharp fall in the rand, which hit a five-year low against the dollar yesterday.

Rand weakness normally makes local products more competitive globally.

"Insufficient demand driven by a slowing domestic and international growth setting, together with stubbornly high input prices, will continue to weigh on output growth in future months," said Standard Bank economist Danelee van Dyk.

Manufacturing output fell 0,4% in July itself, while growth in the three months to the end of July slowed to a meagre 0,2%, seasonally adjusted, the data showed. In the first seven months of this year, production grew 3,4% -- down from 5% in the same period of last year.

"This is more gloomy news on the economy," said Standard Chartered's regional research head for Africa, Razia Khan.

But some analysts said the data were surprisingly resilient, given that the purchasing managers' index (PMI) -- a health gauge for the sector -- has produced readings below 50 for six out of eight months this year.

That would normally point to contracting output, while a reading above 50 indicates an expansion in activity. The monthly PMI slumped to a record low at 42,8 in July but rebounded to 47 last month as falling oil prices provided relief for the rising cost of inputs.

"We see very little in other economic indicators to suggest that manufacturing production could continue to show strength," Absa Capital said.

Output from factories, which provide 14% of formal employment, rose 14,5% in the second quarter after falling 1% in the previous quarter, official data showed earlier this year. But in the three months to end-July, five of nine industries fell compared with the previous three months, Stats SA said yesterday.

Motor vehicle parts dived 6,4%, reflecting pain inflicted on the industry by the rising cost of household debt. Glass and nonmetal industry contracted 6,4% in the quarter while textiles, clothing and footwear fell 2,9%. Furniture production rose 5,1%, which was a surprise given that durable goods purchases have also been hit by rising debt costs.

Analysts said a slowdown in fixed investment from the private sector had negative implications for factory output in the near term.

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