February data paints a sorry picture of manufacturing before Covid-19 hit
Mining races ahead but factory output records its ninth consecutive month of declines
Manufacturing data released on Tuesday underscored the underlying weakness in the sector even before the economy was almost entirely shut down by the coronavirus pandemic and the ensuing lockdown, economists have said.
Factory output during February recorded its ninth consecutive decline on an annual basis, at a time when the country faced rolling power cuts over the the course of the month.
But the data — which has been delayed as Stats SA has been hampered in conducting its survey work during the lockdown — does not cover the actual lockdown period, which began at the end of March.
Economists expect that future prints, particularly for the second quarter beginning in April, will provide a clearer picture of the expected knock to the economy and its ultimate effect on economic growth this year.
Estimates vary, but some of the gloomier predictions from Business for SA suggest growth could contract as much as 16.7% depending on the duration and severity of the lockdown.
Manufacturing production fell 2.1% year on year in February, but this was slower than market expectations where the prediction was for a 2.8% decline. On a seasonally adjusted monthly basis, the decline was sharper, falling 2.3%, well down from January’s 3% growth
When the February numbers are examined alongside more recent indicators, including the latest manufacturing purchasing managers’ index (PMI) and recent business activity surveys conducted by Stats SA, this suggests the second quarter is going to be the worst hit, said Sanisha Packirisamy, an economist at Momentum Investments.
Important sub-components of the Absa PMI for April, namely business activity and new sales orders, crashed to lows never seen in the survey’s history, underscoring the near total halt to activity during the lockdown. Manufacturing accounts for roughly 13% of GDP.
“We must vasbyt because I think some of the April data is going to look a bit nasty when it starts coming out,” Packirisamy told Business Day.
SA manufacturing has been under enormous pressure for a considerable time, with output remaining far below the level of activity that prevailed before the onset of the global financial market crisis in 2008, Stanlib chief economist Kevin Lings said in a note.
“Production will have recorded a very sharp decline in the period from March to May 2020 as the Covid-19 lockdown pushes many sectors to the point of collapse,” he said.
The sector was already on the back foot, said Nedbank economists Nicky Weimar and Busisiwe Radebe, and “outlook for manufacturing production remains quite bleak for the remainder of the year due to the devastating effect of the coronavirus on the world economy”.
Tuesday also saw the release of mining production numbers for February. Growth slowed marginally to 7% year on year, down from January’s 7.5%, coming in well above market expectations of 4.8%. The largest positive contributions were from coal, platinum group metals (PGMs) and gold, with the three mineral groups holding the largest weighting in the production basket.
On a seasonally adjusted basis in the three months ended February, mining production declined 2.7%, with 10 out of 12 mineral groups reporting a decline in output. Gold and PGMs were the exception.
“The annual increase can be ascribed to a combination of base effects, as mining production decreased by 7.5% year on year in February 2019, as well as favourable commodity prices incentivising miners to increase extraction in high-cost areas of their mines,” FNB economist Geoff Nölting said in a statement on the figures.
“In a post-Covid-19 environment we expect the overall mining sector to have negative annual growth in 2020.”
There are, however, some silver linings on the mining front, said Nölting. Some commodities such as gold could benefit from higher prices, as its price tends to rally during times of economic uncertainty as investors flock to safe-haven assets.
“In addition, PGMs such as palladium and rhodium, due to more stringent vehicle emissions standards particularly in Europe and China, will likely trend higher,” he said.