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MANUFACTURING: Sector In Dire Straights


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The BER’s latest survey showed that the manufacturing sector remained in dire straits during the second quarter. With nine of the thirty business conditions indicators based on the BER Manufacturing Survey at new (or at least in line with) historical lows, manufacturing business confidence dropped in line with its previous long-term minimum (also reached in 1998Q3) of 11 index points.

Exporters remained under unparalleled pressure as weak global demand continued to take its toll. Domestic demand also deteriorated further, surprising producers on the downside. “Although demand contractions continue to be broad-based across the manufacturing sector, the consumer goods sub-sector held up relatively better than the rest” said BER economist Christelle Grobler.

Following on the first quarter’s record low level of average hours worked per factory worker, retrenchments occurred at an unprecedented pace. The lagging employment indicator dropped to a new record low during the second quarter. Fixed investment also declined further given low capacity utilization and general uncertainty regarding the business environment.

The survey indicated very sharp deceleration in the rate of increase in average selling prices (both domestic and foreign) per unit of production. “These plummeting rates are testimony to the weak demand situation and could be hinting at declining manufacturing selling prices, since our indicators are consistent with negative producer inflation at these levels” said Grobler.

In accordance with the Kagiso PMI price index, manufacturers across the board again reported a drop in the rate of increase in the average total cost per unit of production (the first quarter results also revealed a notable decline). According to respondents, the slowdown in unit cost inflation was mostly driven by lower than expected rises in the rate of increase in the average purchasing price per unit of raw material.

However, the survey also provided tentative signs that the worst of the contraction in manufacturing activity may be behind us. Production volumes did not contract further, but remained very weak amid deteriorating global and domestic demand coupled with accumulating finished goods stocks. “We expect the pace of deterioration in production to slow further in the third quarter – as also forecasted by our respondents” said Grobler.

Furthermore, there was a notable upwards adjustment regarding expectations of business conditions over the medium term. This is in line with the May Kagiso PMI results which also revealed that producers expect an improvement in conditions over the next 6 months.

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