Manufacturing, mining slightly up, business confidence passive
The latest mining and manufacturing data does not have good news for the economy and will have an adverse effect on GDP.
Manufacturing and mining recovered slightly in August, but business confidence is passive, lacking substantial upward momentum.
According to Statistics SA, seasonally adjusted manufacturing as well as mining production increased on a monthly basis. However, while manufacturing output was up in annual terms during August, mining production was down for the second month in a row.
Economic research group, Oxford Economics Africa, says industry experienced a weaker quarter and it expects real GDP growth to moderate in the third quarter.
Seasonally adjusted mining production increased by 0.8% in August compared to a sharp 1.7% decline in July compared to June. Annual output was down by 2.5% most recently, following last month’s 4.4% contraction compared to a year ago.
The largest negative contributors were:
- diamonds (-54.6% and detracting 2.7 percentage points)
- manganese ore (-7.9% and detracting 0.6 percentage points)
- other metallic minerals (-17.6% and detracting 0.5 percentage points).
Seasonally adjusted mining production decreased by 2% in the three months ending August 2023 compared to the preceding three months. Gold, coal and manganese ore were the main detractors of growth over the three-month period.
Manufacturing production increased slightly
On the other hand, seasonally adjusted manufacturing production increased by 0.5% in August compared to a 1.7% drop during July compared to June. The largest positive contributors to the 1.6% annual increase were the petroleum, chemical products, rubber and plastic products (+7.2% and contributing 1.4 percentage points) and basic iron and steel, non-ferrous metal products, metal products and machinery (+4.0% and contributing 0.8 percentage points) subsectors.
However, seasonally adjusted manufacturing production decreased by 0.4% during the three months ending in August 2023 compared to the preceding three months. Statistics SA noted that four of the 10 manufacturing divisions reported negative growth rates over this period.
“The August industry output data should provide key insight into how industry fared during the third quarter. The modest increases in the seasonally adjusted numbers show that industry experienced a weaker quarter, after performing better than expected during the first two quarters of the year,” Jee-A van der Linde, senior economist at Oxford Economics Africa, says.
“It is becoming clearer that growth in manufacturing and mining moderated in the third quarter, but the September numbers should ultimately show whether these sectors will detract from overall third quarter real gross domestic product (GDP).”
He says in addition the September manufacturing PMI numbers pointed to a significant drop in activity, dragged lower by weak demand conditions, both domestically and abroad. “Our baseline is for real GDP growth to moderate to 0.1% in the third quarter (from 0.6% in the second quarter), while the odds of a quarterly contraction remain high. We forecast the economy will grow by 0.8% this year and by 1.0% in 2024.”
Business confidence lacks substantial momentum
Business confidence is also not looking great.
The SACCI Business Confidence Index recorded a reading of 108.6 in August, followed by 108.2 in September, with the base year set at 2020=100. While this represents a slight increase from the July 2023 figure of 107.3, it is evident that the index has been lacking substantial upward momentum, hovering around an average level of 107.5. In comparison, the index for September is 2.7 index points below the corresponding level in September 2022.
From an average level of 112.5 in the fourth quarter of 2022, the index declined to 112.0 in the first quarter of 2023, further dropping to 107.6 in the second quarter, before rebounding to 108.0 in the third quarter.
SACCI says despite the absence of a strong upward trend in business confidence, the index appears to have stabilised, with an average of 109.2 in the first nine months of 2023, slightly surpassing the 108.7 recorded during the same period in 2022.
In the short term, foreign business-related factors, including merchandise imports, exports and inward tourism, had the most positive impact on business confidence in September 2023.
Over the medium term, increased inward tourism and higher precious metal prices made notable positive year-on-year contributions.
Conversely, the unpredictability of the weaker rand against major trading currencies, increased real cost of credit and reduced merchandise export volumes had the most notable negative year-on-year impact on business confidence in September 2023.
“Addressing the current fiscal challenges there is a renewed emphasis on preserving debt-servicing capacity in public finances. Many countries, including South Africa, are compelled to consolidate over the medium term to achieve prudent debt targets,” SACCI says.
Critical institutional reforms needed
The International Monetary Fund (IMF) highlights the importance of critical institutional reforms tailored to the needs and constraints of developing countries. These reforms encompass medium-term budgeting, fiscal risk management, expenditure controls and revenue administration.
The recent Brics summit in South Africa explored alternatives to the World Bank and IMF to better cater to the specific needs of emerging economies, although the details of this alternative approach require further verification.
SACCI says the minister of finance acknowledges the tight fiscal conditions and debt situation necessitating the application of austerity measures by the government, while Treasury also cautioned that the fiscus is under unprecedented revenue and expenditure pressures.
“This fiscal strain is reverberating across various public sector institutions, impacting service delivery from central government to local authorities.”
SACCI says the index continues to exhibit a sideways movement, signalling that the current business climate is not conducive to stimulating overall economic activity. “Remedying this situation and enhancing the economy’s long-term prospects will require appropriate investments in human capital and fixed capital stock.”