Johannesburg - South Africa's factory output shrank at a much lower rate in November, bolstering hopes that the economy is slowly getting back on its feet after a recession and in the face of weak domestic demand.
This reinforces the view that the interest rate will probably remain unchanged in 2010, after cuts of 500 basis points between December 2008 and August 2009 to help the struggling economy.
Data from Statistics South Africa on Tuesday showed manufacturing production contracted by 4.7% year-on-year in volume terms in November, compared with a revised 9.6% fall in October, from 9.3%.
Economists polled by Reuters last week had predicted a year-on-year decline of 5.7% for November.
"It's fairly in line with the improvement in economic conditions that we have been anticipating," said Kabelo Masike, an economist at power utility Eskom.
"It's still in negative territory, but at a slower pace of contraction, adding credence to the view that the economy could grow at a slightly increased pace during the next quarter."
Africa's biggest economy grew by an annualised 0.9% in the third quarter of 2009 after three consecutive quarters of contraction. Gross domestic product (GDP) is seen returning to positive full-year growth of 1.5% in 2010 after shrinking about 1.9% last year.
Manufacturing a key employer
Manufacturing is the second-biggest sector in the economy after financing and real estate, accounting for about 14% of GDP. It is also a key employer.
Latest figures from Statistics SA show manufacturing expanded by 7.6% in the third quarter, helping pull the economy out of its first recession in nearly a decade.
The Purchasing Managers' Index, a key measure of factory activity which points to trends ahead of official data, rose to 50.3 in November, breaking above 50.0 for the first time in 18 months after being hit by depressed domestic and global demand.
Demand remains fragile after the recession slashed nearly a million jobs, but the South African Reserve Bank is likely to hold off on any further rate cuts, with renewed price pressures seen from higher power costs.
"We continue to believe that monetary policy's contribution to the recovery has largely played out," said Absa Capital macro strategist Jeffrey Schultz.
"The Reserve Bank is likely to be more focused on the largely and somewhat uncertain inflation outlook, given the proposed electricity tariff increase.
The bank's Monetary Policy Committee holds its next two-day rates meeting on January 25/26.
- Reuters