‘Stronger-than-expected’ manufacturing growth, faltering business confidence

Vehicle and parts production increased with 8.3% (Reuters)

Vehicle and parts production increased with 8.3% (Reuters)

Business confidence fell in the third quarter this year, following South Africa’s slide into a technical recession.

The RMB/BER business confidence index fell to 38 in the third quarter from 39 in the second quarter. The index, compiled by Rand Merchant Bank and the Bureau for Economic Research, measures the sentiment of businesses to the current economic climate.

The BCI might only be a one point decrease between the second and third quarters, but, according to Investec economist Annabel Bishop, “this decline strengthens the fact that close to two thirds of businesses surveyed found conditions unsatisfactory”.

The index can vary between 0 and 100, where 0 indicates an extreme lack of confidence and 100 extreme confidence. This number is the unweighted mean, or average, of five sectors’ indices: manufacturing, building, retail, wholesale and new vehicle dealers.

“Although confidence rose marginally in two of the five sectors covered in the survey, not a single sector in the third quarter had a number above the neutral level of 50 — an infrequent and worrying development,” the Bureau for Economic Research noted in a statementon Tuesday.

Bishop noted that the third quarter’s number was not unexpected, with its retreat following the announcement that the country was in a technical recession last week, “the pronounced rand weakness over the third quarter on heightened risk aversion to emerging markets”.

According to Bishop, almost 80% of businesses operating in the manufacturing industry “feel conditions are unsatisfactory for running their enterprises”.

“This statistic should be very worrying for government as it foretells the risk of a poor third quarter for the manufacturing industry, a key component of GDP.”

Manufacturing Data

Weighing against the bad news however, Statistics SA’s manufacturing data reported an a 2.9% year on year increase, which, Absa economist Miyelani Maluleke said, was a lot stronger than analysts expected.
He added that the health of the manufacturing economy was critical for the economy because of its strong links with other sectors.

Firstly, the July numbers were drawn from a new sample set which may have impacted on the growth rate. Secondly, the August PMI plunged 8.1 points suggesting a negative print in the next set of figures, and potentially compromising a full third quarter expansion.

FNB economist Jason Muscat said the third quarter manufacturing GDP “got off to a good start, with a 2.9% year on year increase, up from 0.6% in June”.

Economists, Maluleke said, had forecast July’s manufacturing growth of 1.1% year on year.

However, Muscat warned that the results may be transient, and “should in no way be interpreted as a turnaround in fortunes”.

“Firstly, the July numbers were drawn from a new sample set which may have impacted on the growth rate,” he said “Secondly, the August [Purchase Managers Index] plunged 8.1 points suggesting a negative print in the next set of figures, and potentially compromising a full third quarter expansion.”

The PMI is a monthly indicator of business conditions in the manufacturing sector.

The July figure was given a significant boost by a 5.8% year on year jump in food and beverage production, and wood and its related product manufacturing showed growth at 3.9% year on year.

Vehicle and parts production also increased with 8.3%.

The release of Tuesday’s data is unlike to “tip the balance on the Reserve Bank’s MPC Monetary Policy Committee meeting in favour of raising interest rates to tackle the recent rise in inflation,” London-based research consultancy group Capital Economics noted in a statement.

The Reserve Bank continues to face a policy dilemma, said Maluleke, “in that inflation risks have increased and this would ordinarily require higher interest rates but economic growth and domestic demand is very weak and this requires a more supportive policy stance”.

Maluleke said that Absa expects the Reserve Bank to keep interests unchanged next week.

“The manufacturing data alone are unlikely to change the Reserve Bank’s thinking about the state of the economy. We think they would prefer to see more broad-based signs that economic activity is improving,” Maluleke added.

Gemma Ritchie

Gemma Ritchie

Gemma Ritchie works in the Mail & Guardian's online department. She majored in English Literature at a small liberal arts college in the USA.  Read more from Gemma Ritchie

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