Factory output contracts, supports rate cut

South Africa’s manufacturing output contracted in the year to May, official data showed, indicating the sector remains under pressure from depressed demand and backing the case for possibly another interest rate cut.

Manufacturing makes the second largest contribution to the economy, accounting for about 15% of GDP, but has taken a knock from sharply lower demand both at home and globally as world economies grapple with recession.

Data from Statistics South Africa showed May output contracted by 17,1% year-on-year in volume terms, albeit a lower pace of decline than the revised 21,8% contraction for April.

“It is still pretty weak, but it is definitely better than what would now appear to look like ... was the trough and that is the April number,” said Nedbank economist Nicky Weimar.

“But the fact that it is still declining by 17% is not good, and it suggests that manufacturing of the second quarter remained very, very weak, and that’s going to be a major drag on GDP.”

Manufacturing production fell by an annualised 22,1% in the first quarter of 2009, the biggest decline on record.”

The central bank has sought to breathe life into the economy through 450 basis points worth of interest rate cuts since December, which have brought some relief to debt-ridden consumers after 500 basis points of increases in the two years to June 2008.

The bank however left rates unchanged last month, as targeted annual consumer inflation remains worryingly above a 3% to 6% band, at 8%.

The central bank is due to hold five more monthly meetings between August and December, and some analysts believe these might yield at least one more rate cut.

Stats SA said compared with April, manufacturing production in volume terms rose by a seasonally-adjusted 1% in May.

Factory output was down 3% in the three months to May compared with the previous three months, also on a seasonally-adjusted basis.

The World Bank says South Africa’s economy will shrink by 1,5% this year. The National Treasury has also conceded it will have to revise downwards its own February forecast of 1,2% growth. - Reuters

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