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SA possibly in technical recession - analyst

Johannesburg – Manufacturing production dropped 3.6% in February 2017, compared to the previous year. This is the worst figure recorded since July 2014 and signals that the country may be in a technical recession, said FNB economist, Jason Muscat.

The data released by Statistics South Africa (Stats SA) on Tuesday shows the main contributors to the decline was production of petroleum, chemical products, rubber and plastic products, contracted 9.3% and that of wood, wood products and paper, publishing and printing was down 2.4%.

Since January 2017, production declined 0.4%. This contrasts with annual growth of 0.8% reported in January 2017

Essentially, eight out of nine manufacturing categories contracted. Only motor vehicle parts and transport equipment production grew by 0.8% compared to the previous year.

“While the data reflects broad domestic economic weakness, we had anticipated that improving global growth and recent buoyant PMI [Purchasing managers Index] readings would have offset softer local demand, particularly as far as export manufacturers were concerned,” said Muscat.

If there is no turnaround in March, the sector will contract for the first quarter of the year, he explained. “Our initial forecasts suggest the possibility of a technical recession.” This follows two consecutive quarters of negative GDP growth, due to a possible contraction in the first quarter of 2017, which follows a contraction in the last quarter of 2016, he explained.

Muscat explained that such a recession does not stem from the recent Cabinet reshuffle which saw former Finance Minister Pravin Gordhan being replaced by former Home Affairs Minister Malusi Gigaba. The reshuffle led to ratings agencies, Standard & Poor’s (S&P) and Fitch, each downgrading the sovereign rating to junk status over policy uncertainty.

Muscat added that further contractions are likely if there is heightened political uncertainty.

The latest figures are lower than market expectations, said Stanlib chief economist Kevin Lings. “The market was expecting production to increase in the month largely as a result of the Barclays PMI data holding above the key 50 index level.”

However, during the three months from December 2016 to February 2017, manufacturing fell 0.8%. “The sector continues to be a drag on the overall performance of the South African economy,” he added.

“South Africa’s manufacturing sector is still struggling to gain any meaningful traction.” Lings said the possible improvement in agricultural production and an uptick in mining will help “steady” manufacturing production.

The low manufacturing levels might result in downward revision in GDP growth forecasts, he added. 

SA manufacturing production

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