MINING and manufacturing shrank in May, confirming that economic growth in the second quarter will be weak — and supporting the case for unchanged interest rates next week.
Although the data count against rate hikes, the Reserve Bank has indicated that interest rates alone cannot support economic growth.
The Bank might opt to hike to tame rising inflation.
The consumer price index (CPI), which measures consumer inflation, breached the top end of the Bank’s 3%-6% target in April at 6.1%, for the first time since August last year.
Mining output shrank by a steep 6.5% year on year in May, from a small increase of 0.2% in April.
In May, CPI rose a higher-than- expected 6.6% year on year, the most in almost five years. Mining and manufacturing combined account for more than 20% of domestic output and were severely affected by the five- month-long wage strike at platinum mines, which was settled last month.
The production of platinum group metals (PGMs) fell significantly in May as workers went on strike.
The decline in manufacturing was led by lower production of vehicles and other transport equipment, and machinery. The poor production performance by the motor vehicles, parts and accessories division was also due to a retooling of a large vehicle manufacturing plant, BNP Paribas Cadiz economist Jeff Schultz said.
Policy makers are faced with the unenviable task of dealing with weak economic growth, rising inflation and high unemployment. The Bank can no longer maintain record-low interest rates given rising inflation, while the
The main contributor to the 5.6% decrease were PGMs (contributing -7.2 percentage points).
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government has to avoid overspending and borrowing more.
Mining production fell 6.5% year on year in May after increasing 2% year on year in April, mainly due to a sharp drop in PGMs. The metals fell 48.5% — the largest drop on record.
Output in manufacturing — the economy’s second-biggest sector — contracted 3.7% year on year in May after falling 1.9% year on year in April.
The 3.7% drop was the lowest output level since September last year.
Nedbank economist Isaac Matshego said the latest data were an indication that production was very weak due to supply disruptions in the local economy.
He said these data would play a role in the decision by the Bank’s monetary policy committee (MPC), which meets next week.
“We do not expect interest rates to change next week as the Reserve Bank strives to strike a balance between rising inflation and weak economic growth,” Mr Matshego said.
Nomura International emerging markets economist Peter Attard Montalto, however, said Nomura forecast a rough split of probabilities — a 50% likelihood of a 50-basis-points hike, a 20% likelihood of a 25-basis-points hike, and a 30% likelihood of unchanged rates.
“The MPC decided some time ago that it was not its job to address structural constraints on growth, and ultimately while weak growth would slow any hiking cycle, it could not change a need to tackle inflation,” he said.
The unresolved strike by more than 200,000 metal and engineering sector workers poses risks to the economic growth outlook for the third quarter. The strike started on Tuesday last week.
The effect might not be severe if workers and employers find a settlement to prevent the two- week strike from continuing.
Indications were that employers and unions representing workers were edging closer to a deal following the government’s mediation efforts.
Local manufacturers are supposed to be reaping the benefits offered by a weaker rand.
But feeble domestic demand, a slow pick-up in global demand, production stoppages due to strikes, and rising administered costs are all negatively affecting output and exports.
The government has increased funding to the sector in recognition of its challenges and in efforts to boost its performance, given the sector’s contribution to economic growth and as an employer of many people.
Indications so far are that manufacturing production could have improved last month.
A leading indicator of activity in the sector — the Kagiso purchasing managers’ index (PMI) — rose to 46.6 last month from 44.3 in May. The index needs to be above 50 to point to expansion in manufacturing activity.
Mr Schultz said the fact that the Kagiso PMI remained below 50 was a reflection of the “great deal of strain” the manufacturing sector was under .