ECONOMIC WEEK AHEAD: Global slowdown expected to take a toll on factories and mining
Economists expect Stats SA to report another contraction in manufacturing output
Manufacturing and mining production are in focus in the week ahead, with the performance of these major sectors of the economy expected to be disappointing as they battle a tough global environment and an uncertain domestic outlook.
The median forecast among economists polled by Bloomberg is for Stats SA data on Thursday to show manufacturing production contracted 1.5% year on year after a 1.1% fall in July.
The sector, which contributes about 14% of GDP, has been affected by weak domestic demand and subdued export growth, due to the effect of the US-China trade war. The outlook does not look any better, with manufacturing activity having fallen to its worst level in a decade in September, according to Absa’s purchasing managers’ index (PMI).
Weak manufacturing data from the US and the eurozone add to concerns that the global economy is in danger of slowing.
“The deteriorating global macroeconomic backdrop was reinforced by the latest release of global manufacturing PMIs that signalled that manufacturing is headed for a recession amid a synchronised global downturn,” Investec economist Kamilla Kaplan said. “Against this tenuous global backdrop and persistently weak domestic demand, SA’s manufacturing PMI has dropped to its lowest level since the 2008/2009 recession.”
According to a Bloomberg median forecast, mining production is likely to have shown little or no growth after an increase of 2.4% in the previous month. The data is also due on Thursday.
FNB economists, however, “anticipate another relatively steady increase in the August release” but said that this was off a low base, with the sector having contracted 6.7% in 2018.
Despite growing 14.4% in the second quarter of the year, rebounding from the effects of load-shedding, it is still confronted by dwindling demand, potential labour strikes and the controversial third iteration of the Mining Charter.
“Underlying output activity is constrained by a persistently uncertain policy environment, an escalation in operating costs and periods of labour unrest,” Kaplan said. “The sector also faces an increasingly challenging global environment as slower growth, particularly in China and the US, would dampen the global demand for commodities.”
The SA Chamber of Commerce and Industry business confidence index on Wednesday is expected to have declined further in September, having fallen to a 34-year low of 89.1 index points in August.
The median forecast according to a Bloomberg poll is for the index to fall to 89, as business people become more wary about the growth prospects of the domestic economy.
The waning business confidence comes as President Cyril Ramaphosa faces pressure to implement the government’s promised growth-boosting economic reform agenda.
Expectations regarding SA’s economic growth in 2019 have steadily fallen in past months, with the Reserve Bank in July slashing its forecast to 0.6% from 1.7% at the start of the year.