The Stellenbosch-based Bureau for Economic Research’s (BER) latest Manufacturing Survey indicated that manufacturing business confidence stabilized at relatively low levels, edging down from 36 to 35 index points. However, the relatively low confidence index hides the improvements in business conditions as reported by manufacturers.

Domestic demand conditions improved notably during 2011Q4. The better than expected improvements in the domestic sales and order volume indicators signalled continuing local demand for domestically manufactured goods. The reading for domestic order volumes rose to a 4-year high, whilst domestic sales volumes also increased markedly.

Export market conditions also improved significantly. Both the indicators for export sales and order volumes rose to their first positive reading since 2003Q1. Nkanyiso Hlongwa, a BER Economist at Stellenbosch University said, “The weaker rand exchange rate may have provided a boost to export conditions as it helped make South African products more attractive to international buyers.”

The combination of strong domestic and export sales growth led to a significant pick up in the production volumes indicator. This led to manufacturers reporting an increase in the number of average hours worked per factory worker as well as a decline in the rate of retrenchments. “Given the improved demand and production readings, respondents reported a rise in the average hours worked per factory worker. Should the rise in work hours be sustained into 2012, it may bode well for employment creation in the sector,” said Hlongwa.

Total cost inflation moderated marginally whilst domestic selling price inflation remained broadly unchanged. However, there was a strong acceleration in the rate of increase in export selling prices, with the indicator rising to its highest level in three years. “Once again, the depreciation of the rand may have contributed notably to manufacturers being able to adjust their export prices,” said Hlongwa.

Although production activity and business conditions improved, manufacturers reported low rates of capacity utilization during 2011Q4. “This may have dampened confidence levels in the sector.

Furthermore, uncertainty about the global economic climate and its impact on South African manufactured exports and the domestic economy may have also weighed negatively on manufacturers’ confidence levels. In addition to already unfavourable business climate, supply shortages of structured steel products and liquefied petroleum gas may have added to the lack of satisfaction regarding the prevailing business conditions,” said Hlongwa.

Overall, the underlying detail suggests broad based improvements in manufacturing activity during 2011Q4. However, downside risks remain, mainly from the slowdown in Eurozone economic growth momentum.

Manufacturers remain rather cautious about the outlook for the sector. The respondents expect business conditions to deteriorate in 2012Q1 and to remain weak in a year’s time.