Manufacturing lift may help bring rates cut

Revamped Prestige Clothing factory in Caledon Image Source Dragon Media

The Ramaphosa renaissance showed another green shoot of economic revival, Tuesday, with an uptick in manufacturing output – triggering a prediction that an interest rate cut may be looming. 

Statistics SA announced that manufacturing production in January grew year-on-year by 2.5%; although it contracted by a seasonally adjusted 1,6% month-on-month.

“The annual increase was mainly the result of higher production of food and beverages, metals and machinery as well as motor vehicles and other transport equipment,” said Nedbank’s economic unit.

”The gradual recovery in manufacturing production, which started towards the end of last year, is expected to gather moderate momentum throughout 2018, driven by stronger global demand, firmer international commodity prices and some improvement in domestic demand.

“Many key uncertainties have been resolved since the last MPC meeting in January.

“The political landscape has changed for the better as President Cyril Ramaphosa has adopted decisive measures to restore confidence, root out corruption and improve government’s finances.

“This year’s National Budget set a realistic path to reducing the budget deficit and slowing the rate of debt accumulation. Recent statistics also suggest that the fragile and patchy economic recovery, which started around the middle of last year, is gradually strengthening and broadening.

“These positive developments are likely to convince Moody’s rating agency to leave South Africa’s sovereign risk rating at investment grade, which removes the threat posed by large-scale forced bond sales to the rand.

“With the rand proving relatively resilient and inflation surprising on the downside in recent months, we believe that the MPC will use the opportunity at its March meeting to provide an added stimulus, albeit marginal, by cutting interest rates by 25 basis points.

“Inflation will probably trend higher later in the year and in 2019, ultimately requiring some monetary tightening, probably around the second half of 2019.”

Steel and Engineering Industries Federation of Southern Africa (SEIFSA) Chief Economist Michael Ade said the data reflect an increase in output in the metals and engineering (M&E) sector, in line with the broader manufacturing sector.

“The output performance of the M&E cluster is welcomed and the expectation is for the positive growth path to continue, as all stakeholders within the cluster and the broader manufacturing sector step up efforts to boost overall production. The performance of the M&E cluster generally augurs well for the broader domestic economy and hopefully will significantly boost the real Gross Domestic Product (GDP) for quarter 1 of 2018,” he said.

However, he suggested  economic challenges remain.

“It is clear that while the recent political forces of change have the potential to improve on perception, credit worthiness and the output stance of the domestic economy, there is still more work to be done in all industrial sectors in general and in the manufacturing sector in particular.

“The contribution of the manufacturing sector to the broader economy has declined over the years, from roughly a 24% contribution to GDP in the 1990s to a low 12.29% in 2017, with dire consequences on jobs levels,” Ade said.

“Clearly, there is still more work to be done and all stakeholders have to pool resources together to ensure a return to the glorious growth levels last recorded in the early 1990s. Accordingly, a continuous rebound in production is needed if the manufacturing sector is to regain its position as the main contributor to the broader economy.

“This objective is possible, given the improvement in business confidence and sentiments since the beginning of this year, against the backdrop of a domestic political shift.”

Investec suggested that the domestic manufacturing sector continues to derive support from the upturn in global manufacturing and the improvement in international trade.

”Additionally, recent petrol and diesel price cuts should feed through indirectly into producer price inflation, easing cost pressures for manufacturers.”

Be the first to comment on "Manufacturing lift may help bring rates cut"

Leave a comment