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Shrinking factory output points to rates cut

Factory output continued to dive at an alarming rate in March, confirming the economy's second-biggest sector is still shrinking and backing the case for another hefty cut in interest rates this month.
Manufacturing fell 11.7% compared with the same month last year, moderating from a record drop of 15% in February, official data showed yesterday, 12 May 2009.

In the first quarter of this year output contracted 6.8% from the previous quarter — reinforcing impressions that SA has entered its first recession in 17 years.

Stanlib economist Kevin Lings said the figures would “severely impact” on the official first-quarter estimate of economic output, due two days ahead of the Reserve Bank's next interest rate decision. That may cement the case for a further full percentage cut in its repo rate, which stands at 8.5%.

“Unfortunately, this slump in manufacturing activity is also probably going to be accompanied by further job losses,” Lings said.

Manufacturing was one of the main culprits behind a leap in SA's unemployment rate in the first quarter of this year, shedding more than 60,000 jobs.

It was also the main reason overall economic output fell 1.8% in the fourth quarter of last year, the first contraction in a decade. Economists believe that gross domestic product (GDP) shrank even more sharply in the first quarter of this year.

“Today's data supports our view that GDP contracted by at least 3.7% in the first quarter of 2009, which, if true, should be a concern to policy makers,” Investec economist Kgotso Radira said. The official GDP data are seasonally adjusted and annualised.

“With a recovery not expected over the short term, more retrenchments can be expected in the coming quarters,” he said.

Manufacturing makes up about 16% of economic output and has been hard hit by the global recession, which has eroded demand for local exports.

Export-driven industries drove the sector's woes in March, the data from Statistics SA showed.

Motor vehicles and parts plunged by nearly 27% versus the same month last year. Iron, steel, machinery and equipment industries dived more than 24%, also reflecting falls in ferrous metal prices. Textile and clothing production fell nearly 13%.

Capacity utilisation for the sector dived to 78.2% in the first quarter of this year — its lowest in a decade.

Source: Business Day

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