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Johannesburg - Manufacturing production surprised on the upside in July, coming in at a year-on-year growth rate of 7.5%, but was well down on June's revised growth rate of 9.3% - strengthening the case for a cut in interest rates this week.
"This definitely strengthens the case for a cut in interest rates this week. Even though the figure was better than expected, growth was quite a bit down from June. There is some concern about manufacturing production in the second half of this year," Standard Bank economist Shireen Darmalingham said.
The market had expected a growth rate of 6% year-on-year in July. Though some economists felt the better-than-expected figure would have no bearing on monetary policy, they said that they still expected the Reserve Bank to cut interest rates this week, because other data had been weak and the global economy had stalled. The rand was also a major factor indicating an interest rate cut.
The manufacturing figure, described as "surprisingly strong" by Econometrix economist Azaar Jammine, was at odds with the Purchasing Managers' Index (PMI) reading for the month, which was below 50. The PMI is a leading indicator for manufacturing production, and a figure below 50 denotes contraction in the sector. Month-on-month, there was 0.7% growth in manufacturing production in July.
"This figure augurs well for gross domestic product (GDP) growth in the third quarter of this year. But don't expect anything out of the ordinary for GDP. The conclusion to be reached from the data is that it sets the scene for a long period of moderate growth," Jammine said.
He said the stronger-than-expected data was in line with what was happening offshore, with the US Institute of Supply Managers (ISM) indicator also coming in higher than expected. The ISM is similar to SA's PMI. Internationally, there had been a sharp weakening in growth before a bounce-back to moderate levels.
The seasonally adjusted manufacturing production for the three months ended July 2010 increased by 1.5% compared with the previous three months ended April 2010. Darmalingham said if this rate of quarterly growth continued, manufacturing production will contribute about 1.2 percentage points to GDP growth in the third quarter.
- Fin24.com