Bleak finish for one of South Africa’s most important sectors
The latest manufacturing data for South Africa shows a marked decline in production by 5.2% in June, significantly lower than market expectations of -0.9%.
This follows May’s slide of 1.2% (revised), pointing to a considerable recession in a sector that employs over 1.3 million people and contributes approximately 13% to GDP.
Seasonally adjusted output shrank by 0.5% month on month, better than the 3.6% monthly decline in the prior month.
However, when measured on a quarter-on-quarter seasonally adjusted (qqsa) basis—the measure used to calculate GDP—the manufacturing sector increased, albeit modestly, by 0.9%, supported by April’s strong result.
This is a better outcome than in the first quarter of the year, where qqsa shrank by 1.2% in 1Q24.
Therefore, the sector should still add favourably to the second quarter’s GDP reading overall.
According to Investec economist Lara Hodes, a breakdown of June’s manufacturing data indicates that the contraction in production was broad-based, with only the wood and wood products, paper, publishing and printing grouping, and the petroleum, chemical products, rubber, and plastic products category increasing compared to the same period last year.
“The largest negative contributor to the headline reading was the basic iron and steel, non-ferrous metal products, metal products and machinery segment, which fell by -8.4% y/y and detracted -1.8% points from the topline number,” she noted.
The food and beverages grouping which makes up a substantial 21.44% of the manufacturing basket, together with the motor vehicles, parts and accessories and other transport equipment segment detracted a further, combined -3.0% points from the headline outcome.
This is supported by Naamsa’s new vehicle sales release for June which shows that sales were down -14.0% y/y during the month.
“Moreover, the Absa Purchasing Managers’ Index remained in contractionary terrain at 45.7 at the end of the second quarter, evincing a still subdued manufacturing sector,” Hodes said.
Specifically, the Business activity sub-index declined during the month while new sales orders remained lacklustre at 37.9.
More positively, advance indications provided by July’s PMI reading show that conditions picked up notably, with the index moving back into positive territory.
Business activity and new sales orders jumped 14.5 and 17.4 points, respectively.
According to the Bureau for Economic Research, the improvements suggest that on-hold orders are now being realised and translated into better activity, “which bodes well for a stronger performance by the sector” in the third quarter of 2024.
FNB senior economist Thanda Sithole said the print was materially worse than expected, but echoed sentiments that, overall, the sector rebounded over the full quarter.
However, it still shows weak demand in the sector.
“Overall, despite easing energy and supply chain constraints, the weak manufacturing output performance underscores the lacklustre demand for manufactured products, as reflected across various manufacturing divisions outlined below,” Sithole said.
While manufacturing activity underperformed in the first half of 2024, some recovery is anticipated in the second half, the economist noted.
“The manufacturing PMI began the third quarter on a positive note…Additionally, manufacturers have shown slightly more optimism about improvements in operating conditions in the near term.”
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