Economic comment – manufacturing recession bodes ill

Luke Doig, Senior Economist, Credit Guarantee Insurance Corporation.

“Rulers have no authority from God to do mischief,” Jonathan Mayhew (1720 – 1766)

An energy parastatal in distress, parlous domestic and external demand, a plunging exchange rate, adversarial labour relations and rising consumer debt levels paint a poor outlook for economic prospects yet the government believes that it is “making progress in many other areas and aspects of the government programme of action”.

This could not be further from the truth. While the pass-through effects to inflation from the weaker ZAR have been muted to date, the weak state of the manufacturing, agriculture and construction sectors together with headwinds for consumer and government spending, paint a bleak outlook. All but daily revisions are being made to the timelines for new electricity generating capacity to come on line, thereby placing at further risk the likelihood of growth materially exceeding 2014’s 1.5% for quite some time.

Sharply falling crude oil prices are providing some relief to fuel prices, so consumers and businesses alike can look forward to another cut next month so long as the rand holds its ground. Current over-recoveries amount to 60-67 cents per litre for petrol and 63-66 cents per litre for diesel depending on the grade, but would have been some 17-19 cents per litre higher were it not for the weaker exchange rate. The twin devaluation to the Yuan is spooking the markets and adding to pressure on the ZAR which will erode further expected gains from weaker Brent prices.

Although gold and coal sector strikes have been averted for now, any such action will drastically affect downstream suppliers of food, housing services, mining equipment and drilling services, insurance and finance as well as utility and logistic providers. Not to say anything about the impact that lost wages will have on the lives of the affected families and in turn of retail and wholesale suppliers.

With a manufacturing sector already in recession, all efforts are required to avert the potentially debilitating effects on not just manufacturing, but the economy at large. Interest rates may well rise at least another 50 basis points this year and payment default risks remain elevated in our view.