July manufacturing hit worse than expected

Manufacturing production took a worse-than-expected bruising in July, after harder lockdown measures and riots in KwaZulu-Natal and parts of Gauteng weighed down the sector.

Manufacturing output shrank 4.1% year on year, data released by Stats SA on Thursday showed, with the biggest drags coming from the petroleum, chemical products, rubber and plastic product division and the food and beverages division. Though SA posted more upbeat GDP data earlier this week — showing that the economy expanded 1.2% in the second quarter — the manufacturing industry was one of the few sectors that weighed on overall growth, contracting 0.8% in the three months to June. 

The July outcome was markedly worse than the median 3% annual growth estimated by a Bloomberg poll of eight economists.

Manufacturing makes up about 13% of GDP but even before the onset of the Covid-19 virus, the sector had been fragile, contracting 0.9% in 2019, before the pandemic shock saw it plummet almost 11% in 2020. 

Seasonally adjusted figures showed that production declined 8% month on month — also worse than the 3.7% decline the market predicted. 

“The destruction caused by the riots resulted in billions of rand of damage to businesses and infrastructure and disrupted economic activity, forcing many manufacturing plants to close, while interruptions to transport resulted in supply disruptions, affecting production at a range of other manufacturers,” Investec economist Lara Hodes said in a note. 

“This at a time when conditions are already fragile with many businesses struggling to stay afloat, following the effects of the pandemic.” 

In addition, unreliable electricity supply continues to remain a downside risk for manufacturers and the economy, with Eskom’s energy availability factor averaging just 62.8% year-to-date, Hodes added.

But a recent gauge of sentiment in the sector suggests that manufacturing could rebound in August. The most recent Absa purchasing managers’ index (PMI) for August showed that activity recovered sharply — after it slumped into negative territory in July. 

After a record single- month decline in July to 43.5 index points, the index recovered to 57.4 points in August, returning it firmly into expansionary territory. 

Stats SA noted that the July publication drew on a new sample drawn in April 2021, of enterprises with an annual turnover of at least R1,717,025 and that are required to register with the Revenue Service for VAT. 

This replaces the previous sample that was drawn up in April 2019, and as a result the reported level of total sales for the monthly survey of the manufacturing industry for the months April 2021 to June 2021 came in 1.6% higher. 

Despite the statistical sample revisions, July’s adverse events “clearly hurt productive capacity of the manufacturing sector”  Nedbank economists Candice Reddy and Nicky Weimar said in a note. 

“Unfortunately, the effects of social unrest will probably be felt for some months as businesses from manufacturing plants to retail outlets are rebuilt and restored,” they said. 

“Subdued domestic demand and unreliable and expensive utilities will add further strain to the rebound. Much of the recovery will rely on global demand and the containment of the virus, both locally and abroad”

donnellyl@businesslive.co.za