Nedbank: Manufacturing production

12 Aug.

Nedbank Economic Commentary: Manufacturing production – Jun 2011.

Manufacturing output growth remains weak in June.

• Trading conditions in the manufacturing sector remained subdued in June. Output rose by a seasonally adjusted 0,6% m-o-m and 0,9% y-o-y in June, slightly down from the upwardly revised 1% y-o-y growth recorded in May but better than market expectations of a 0,6% y-o-y increase. Over the second quarter, manufacturing production fell by 2% on a seasonally adjusted basis compared with the first quarter.
• Over the month, lower output by big exporter-orientated industries, especially petroleum refineries, chemicals, basic iron and steel and non-ferrous metals, contained the increase in total manufacturing production. Softer global demand and production outages at Arcelor Mittal’s steel works in Newcastle and Van der Bijlpark were mainly to blame. 
• Over the year, the output growth in most major industries slowed off the higher base established last year, with only the production of ‘motor vehicles, parts, accessories and other transport equipment’ remaining well above last year’s levels.
• The manufacturing sector is likely to remain under pressure. Output growth is forecast to be weak, slowing off last year’s higher base in the second half of this year. Softer global growth and international commodity prices will contain exports, while a relatively strong rand, higher electricity costs, rising labour costs and continued production disruption due to strike action will undermine competitiveness and profitability.
• Recent economic data suggest that both the global and local recoveries stalled in the second quarter and this weaker trend continued into the third quarter. The downside risks to the growth outlook have increased, suggesting that manufacturers, wholesalers and retailers will struggle to pass the full extent of the earlier hike in food, fuel and power costs onto consumers. These deflationary forces may convince the Reserve Bank to keep interest rates at current low levels for even longer than the market currently anticipates. We now expect the first rate hike to come in May 2012 and for gdp growth to average 3,3% in 2011 and 3,6% in 2012.

Comment

Growth in manufacturing production remained weak in June, growing by 0,9% y-o-y, slightly down from 1% in May, but still above market expectations of a 0,6% increase.

Over the month, total manufacturing production rose by a subdued 0,6% on a seasonally adjusted basis. The main drag come from big drops in output by the ‘basic iron and steel, non-ferrous metal products, metal products and machinery’ as well as the ‘petroleum, chemical products, rubber and plastic products’ industries, which reflect some pressure on exports and significant production outages at Arcelor Mittal’s steel works in Newcastle and Van der Bijlpark. …

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