Nedbank: Manufacturing production

09 Sep.

Nedbank Economic Commentary: Manufacturing production – July 2011.

Manufacturing production collapsed in July.

• Manufacturing output fell by a sharp 6% m-o-m and 6% y-o-y in July, after growing by a subdued 0,8% y-o-y in June. The drop in output was far worse than the average 0,6% decline anticipated by the market.
• Over the month, output in most manufacturing industries dropped sharply. Protracted strike action disrupted production in the fuel, chemicals and metals industries, while ongoing outages at key iron and steel plants added further pressure. Underlying demand conditions also weakened due to slower global growth, a strong rand and softer domestic spending.
• Over the year, output in almost all major industries fell sharply off the higher base established last year. The only exceptions were the broader ‘glass and other non-metallic mineral products’, ‘radio, television and professional equipment’ as well as ‘other manufacturing’ industries, where production remained above last year’s levels.
• Growth in manufacturing production is forecast to remain weak off last year’s higher base during the remainder of this year. August is likely to have been another difficult month, given production outages and temporary shutdowns at key iron and steel plants. More generally, the upside for the manufacturing sector will be contained by softer global growth, the fading competitiveness of local producers, slower domestic spending as well as weak local building and construction activity.
• Today’s figures suggest that producers remain under pressure. Anecdotal reports and confidence indicators suggest that this weaker trend continued deep into the third quarter. Much therefore depends on consumers. Household income is still growing and interest rates remain low, but confidence is fading because of the weaker economy, fading asset prices, renewed worries about job security and still high debt burdens. Producers, wholesalers and retailers will therefore struggle to pass cost increases onto consumers without compromising sales volumes. The downside risks to economic growth will dominate debate at the Monetary Policy Committee (MPC) meeting later this month. But the MPC will probably remain cautious, opting to keep rates at current levels for longer given that inflation is heading for 6% and wage agreements are settling well above inflation. We therefore expect interest rates to remain unchanged until the second half of 2012.

Comment

Manufacturing production dropped sharply in July, plunging by 6% over both the month and the year. Most major industries reported sharp drops in output on both a monthly and annual bases. The sharpest declines in output were recorded in the basic iron and steel, machinery, electrical machinery, petroleum and chemicals, as well as motor vehicles and parts industries. Only the broader ‘glass and other non-metallic mineral products’, ‘radio, television and professional equipment’ as well as ‘other manufacturing’ industries managed to maintain production above last year’s levels. Protracted strike action was mainly to blame for disappointing figures, disrupting production in the fuel, chemicals and metals industries. Ongoing outages at key iron and steel plants added further pressure. Underlying demand conditions also weakened due to slower global growth, a strong rand and softer domestic spending. …

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