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Factory output blows past forecasts

Jul 12 2012 13:55 Reuters

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Johannesburg - South Africa’s factory output grew above expectations in May compared with last year, backing the case for interest rates to stay unchanged at next week’s policy meeting, although the central bank may cut them later this year to buoy the economy.

The Reserve Bank has kept rates at three-decade lows since late 2010 but some analysts believe it might have to give domestic growth more stimulus as a global downturn hurts exports while inflation is seen staying within target until 2014.

Growth in manufacturing production, which accounts for about 15% of gross domestic product (GDP), outpaced forecasts at 4.2% year-on-year in volume terms in May, after rising by 1.1% in April, Statistics South Africa said.

The median consensus among economists polled by Reuters was for factory output to grow by 1.0% in May.

But the outlook for the rest of the year remains gloomy, with sales to Europe, South Africa’s main trading partner, waning as the region struggles with the impact of its debt crisis.

“(The May data) is encouraging but I don’t unfortunately think it’s very revealing about what lies ahead because the global situation actually deteriorated so it catches us with a lag,” said Nicky Weimar, a senior economist at Nedbank.

“The third quarter is probably going to be weaker than this number suggests.”

Mandla Maleka, an economist at Eskom Treasury, said: “We should have taken proper cue from the PMI (purchasing managers' index) indicators.

"We were clearly seeing that manufacturing output is going to be under pressure, this is the first sign, output is down 0.9% in the three months to May, versus three months previously.

“That is a huge drop, considering that manufacturing accounts for about 15% of the GDP, so we are going nowhere.

“We do not believe that the Reserve Bank is going to cut interest rates, but it further strengthens the case that it should keep the rate low for some time and not even think of a hike even in the first quarter of next year, probably keep them low even for the rest of 2013.”

May’s increase in factory output was mainly due to higher output in food and beverages, vehicles and accessories, transport equipment, and petroleum and chemical products, the statistics agency said.

On a month-on-month basis, production rose by a seasonally adjusted 2.7%, but contracted by 0.9% in the three months to May compared with the previous three months.

The rand recouped some of its earlier losses against the dollar, and was trading at R8.3450 compared with R8.3545 prior to release of the data at 11:00 GMT.

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