M&E production up but high input costs dampen growth prospects

Against a backdrop of generally subdued domestic demand triggered by the technical economic recession and a plummeting exchange rate, the metals and engineering sector recorded a third consecutive increase in output in July.

Statistics South Africa reported a 3.4% increase in production for the sector in July this year over the same month last year, and a 3.2% increase compared to June 2018. Production in the broader manufacturing sector increased by 2.9%.

However Steel and Engineering Industries Federation of Southern Africa (Seifsa) chief economist Michael Ade warned that the increasing cost of inputs would squeeze margins, constrict production and further reduce the cluster’s contribution to the country’s gross domestic product (GDP) – recently recorded to be 0% in the second quarter of 2018.

“Although the annual growth in output is comparatively lower than that of June 2018, the data is encouraging as production is still trending positively,” he said.

“Given that the contribution of the broader manufacturing sector to quarter-two GDP was lower than expected, the performance by its important cluster of industries will provide more impetus for a subsequently higher manufacturing contribution to domestic growth,” said Ade.

He pointed out that certain factors – such as high prices of both domestic and imported intermediary inputs, volatile variable costs (including fuel and energy costs) and the exchange rate – still remained a concern as they had the ability to inhibit the sector’s contribution to the third quarter’s GDP.

“Although a weak exchange rate favours exports, the net effect after accounting for higher intermediate input prices can significantly offset gains from exports. The tumbling rand/dollar exchange rate adds to the cost of imported inputs and is generally counterproductive,” Ade added.

“Moreover, with business confidence currently below the neutral level of 50, which is a rare and perturbing development, businesses may be compelled to pass on cost increases, thereby rendering their products less price competitive.”

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