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Johannesburg - Weak factory output is strengthening the case for further rate cuts, according to Kagiso Securities which released its July purchasing managers' index (PMI) on Monday.
The PMI, which measures activity in the manufacturing sector based on the expectations of supply buyers at factories, is below the key 50 point mark for the second month in a row.
July's reading is 49.5 points, a marginal improvement on June's 48.4 points.
This indicates that the sector is contracting and may pose a real risk to the country's economic recovery, as well as efforts to cut the high unemployment rate.
Recent data from Statistics South Africa showed unemployment increased to 25.3% in the second quarter of the year, from 25.2% in the first three months.
"It will take us longer to get out of this dip and I think there's a good chance we will get a 50 basis-point rate cut next month," said Kagiso Securities fund manager Theo Vorster.
Vorster said another worrying factor was the new sales order component of the PMI which slipped below 50 points during July, indicating that factory sales are relatively inactive.
Concerns over China
South Africa's PMI mirrors a similar trend in Far East manufacturing powerhouse China. The country's PMI, which is compiled by bank HSBC, also fell to 49.4 points.
This is the first time since March 2009 that China's PMI has fallen below 50 points. The latest reading prompted concerns that the Chinese economy is taking strain from Beijing's economic tightening efforts.
However, the Wall Street Journal Online reported that economists have urged the market not to overreact on the negative data.
"This is just a slowdown, not a meltdown," said HSBC chief economist for China Hongbin Qu, according to the report.
Similarly, Vorster told Fin24.com panic over SA's PMI was unnecessary, since it actually showed a marginal improvement on the June figure.
He did not rule out the possibility of a double-dip recession, but said the risk was not huge.
Meanwhile, although Vorster believes a rate cut is on the cards, Absa Capital's macro-economic research unit said it may be premature to call for a cut just yet.
"Interest rate cuts take a while to work themselves through the economy," said Absa Capital macrostrategist Ian Marsberg.
"It will depend on how the next manufacturing data looks," he said.
- Fin24.com
The PMI, which measures activity in the manufacturing sector based on the expectations of supply buyers at factories, is below the key 50 point mark for the second month in a row.
July's reading is 49.5 points, a marginal improvement on June's 48.4 points.
This indicates that the sector is contracting and may pose a real risk to the country's economic recovery, as well as efforts to cut the high unemployment rate.
Recent data from Statistics South Africa showed unemployment increased to 25.3% in the second quarter of the year, from 25.2% in the first three months.
"It will take us longer to get out of this dip and I think there's a good chance we will get a 50 basis-point rate cut next month," said Kagiso Securities fund manager Theo Vorster.
Vorster said another worrying factor was the new sales order component of the PMI which slipped below 50 points during July, indicating that factory sales are relatively inactive.
Concerns over China
South Africa's PMI mirrors a similar trend in Far East manufacturing powerhouse China. The country's PMI, which is compiled by bank HSBC, also fell to 49.4 points.
This is the first time since March 2009 that China's PMI has fallen below 50 points. The latest reading prompted concerns that the Chinese economy is taking strain from Beijing's economic tightening efforts.
However, the Wall Street Journal Online reported that economists have urged the market not to overreact on the negative data.
"This is just a slowdown, not a meltdown," said HSBC chief economist for China Hongbin Qu, according to the report.
Similarly, Vorster told Fin24.com panic over SA's PMI was unnecessary, since it actually showed a marginal improvement on the June figure.
He did not rule out the possibility of a double-dip recession, but said the risk was not huge.
Meanwhile, although Vorster believes a rate cut is on the cards, Absa Capital's macro-economic research unit said it may be premature to call for a cut just yet.
"Interest rate cuts take a while to work themselves through the economy," said Absa Capital macrostrategist Ian Marsberg.
"It will depend on how the next manufacturing data looks," he said.
- Fin24.com
