BUSINESS DAY TV: There may be ‘a turnaround in 2017’
Barclays Africa economist Miyelani Maluleke discusses the persistent weakness in SA’s manufacturing sector even as activity picks up in other parts of the world
Miyelani Maluleke is an economist at Barclays Africa.
BUSINESS DAY TV: The manufacturing sector ended 2016 on a bearish note with Barclays purchasing managers index (PMI) declining for the fifth month in a row. PMI fell to 46.7 index points in December and that’s down from 48.3 in November. And with weak local demand is the sector facing a further decline this year?
Joining us with some of the detail is Miyelani Maluleke who is an economist at Barclays Africa.
Miyelani ... so in the US and the eurozone we’ve got PMI coming in strongly sitting at above 54 points, in China we see that accelerating trend continue, SA remaining stuck below that 50 neutral mark, why are we so out of kilter?
MIYELANI MALULEKE: Yes, absolutely, so we look at the global PMI trend especially towards the end of the year, it really has been strengthening, even in the UK where people are talking about how terrible Brexit could be. We saw very strong manufacturing activity but here in SA we continue to see weakness and as you said for the fifth straight month below that 50 point mark.
It’s very disappointing and it really just marks what has been a very lacklustre year for the manufacturing sector in SA and more interestingly when you look at the fourth quarter as a whole, it’s actually a little bit lower than in (the third quarter) where we actually did have a contraction in manufacturing production. So it does look like we are looking at another quarter that could really be weak and we could have the manufacturing sector actually subtracting from GDP in the fourth quarter.
BDTV: You do provide a glimmer of hope though in the commentary today, so while there’s very weak local demand you do say that the global demand is supporting the PMIs in the US and Europe and China, could feed through to our exporting sector and we have seen that in some extent in car sales exports?
MM: Absolutely, so when you look at our key trading partners, Europe, China, activity is picking up there and even beyond that there is another reason to be a little bit hopeful about prospects for the manufacturing sector in 2017. We’ve been talking a lot over the past year about some of the big supply side challenges that we’ve seen in the sector, electricity being one but Eskom has now connected the first unit of Kusile over the holidays, and the second unit of Medupi has also been connected and it looks like there will be commercial operation of those two in the next six months. That’s an additional 1,600MW of electricity generation capacity.
The drought is also looking a lot better now. We’re seeing dam levels improving so I think that really does form the basis for some improvement in confidence. So we do have in our view that in 2017 we do see a bit of a modest pickup in manufacturing activity. But the big challenge really does remain in domestic demand. In the car sales data that you’re talking about export sales are pretty strong but domestic sales are still pretty poor.
BDTV: Let’s touch on that hope for prospects moving forward as you’ve highlighted though Miyelani because most notably you highlight in your report today, measuring suppliers’ performance has slumped to a historic low of 40.9 and that points to suppliers operating well below capacity. Do they have the wherewithal to turn around their operations and start picking up from a supplier perspective if prospects do improve down the line?
MM: Absolutely. That particular index really does look at the guys that supply the manufacturing sector themselves, so when they’re busier it just means that the manufacturing sector is also busy and the fact that it slumped so much just tells you that across the value chain it appears that there’s this bit of pressure. But I wouldn’t take too much from the magnitude of the decline. I think it’s quite possible to see a bit of a payback in the coming release especially when you tend to see these kinds of decreases. But I think overall again year-end pretty weak but I remain optimistic that in 2017 we could see a bit of a turnaround.
BDTV: It looks like manufacturers themselves are pretty optimistic because expected business conditions six months out continue to remain above 50 so they contracted marginally, but still at 53.2, and manufacturers themselves expect increased demand next year?
MM: And that’s crucial, right, because it’s business people that we’re talking about here and when they themselves are saying look in six months’ time we’re expecting our activity to pick up it’s something that we do have to take a little bit seriously. So in addition to all of these factors I was talking about, there is a bit of a case for a rebound, a modest one at that, in the manufacturing sector....
BDTV: What’s your outlook for the purchasing price index (PPI) because that’s remained unchanged at 65.6 but if you’re looking at just one factor, the fact that you’ve got operators or manufacturers who are sitting at below capacity that implies that you’ve got fixed operating costs that are coming to bear simultaneously?
MM: Structurally SA has really had very strong unit labour costs for a very long time and it’s a point that the South African Reserve Bank also makes quite regularly that this is what’s keeping core CPI (consumer price index) inflation elevated, where you have this strong growth in unit labour cost. I think it is a bit of a challenge for the manufacturing sector, but the fact that commodity prices globally remain fairly modest, remains supportive overall to costs in the manufacturing sector.
BDTV: We saw those November manufacturing production numbers released by Stats SA today and a surprise improvement of 1.9% after the contraction in October, would you expect that to be a temporary improvement just given what you’re seeing in the December PMI or do you expect a reversal?
MM: Yes ... we are actually expecting a bit of an improvement in November because you’ll remember when we got the October data there was this massive slump. So we thought that there would be a bit of a payback, we’re not really surprised by that. But the key thing here is that, that rebound is actually fairly modest compared to the contraction that we had in October and by our calculations, what you’re going to need is a really big increase in December of about 3.5% on a month-to-month basis, at least, to have the manufacturing sector avoid a contraction in (the fourth quarter). So while the November figures seem to be positive it really does not compensate enough for that contraction that we had in October.