SA manufacturers still vulnerable

Johannesburg - South African manufacturers appear to have finally caught a tailwind from the global recovery, but remain vulnerable to fragile recoveries in major trading partners, according to Moody's Economy.com on Friday.

The economists note that the sharp inventory draw down in 2009 has created scope for a rebound in production volumes.

"The strong rand may also dampen the rebound," they say. The economists say that the South African manufacturing production has turned a corner. The Kagiso purchasing managers' index - a key gauge of the health of the manufacturing industry - rose to 52.5 in December from 50.3 in November.

"Although the index has increased consistently since July, the latest reading marks the first time since early 2008 that the index has exceeded the growth-neutral level of 50 for two consecutive months."

New sales orders and business activity, which make up more than half the index, both gained in December, pointing to an expansion in real output. In addition, the inventories component of the index rose sharply, suggesting an uptick in near-term demand after producers sharply reduced their stockpiles for most of 2009.

The employment subindex was also encouraging.

Although it still shows retrenchment in factory employment, the pace of job losses continued to slow in the final months of the year.

"South Africa's manufacturers appear to have finally caught a tailwind from the global recovery after being a laggard for several months. The global and US PMIs entered expansionary territory in August, and the euro zone followed in September. Meanwhile, South Africa's PMI did not rise above 50 until November. The difference between the South African and global PMI indices has also narrowed in recent months, from almost 14 points in August to just 2.5 points in December," says Moody's Economy.com.

With an average reading of 50.1 in the fourth quarter, factory output is unlikely to have contributed significantly to GDP. However, the latest Kagiso PMI indicates that manufacturing will continue to advance in coming months as the global recovery gains momentum. In particular, the sharp inventory drawdown in 2009 has created scope for a rebound in production volumes.

"Risks to the outlook are still to the downside. Given South African manufacturers' dependence on external demand, industry remains vulnerable to the fragile recoveries in major trading partners. The strong rand also threatens to dampen the strength of the rebound," conclude the economists.

- I-Net Bridge