The road to recovery in South Africa’s manufacturing sector will probably be slow and bumpy. Weak domestic demand and persistent power cuts will act as key headwinds, although export-oriented sectors are likely to benefit from a continued rebound in external demand.
- The road to recovery in South Africa’s manufacturing sector will probably be slow and bumpy. Weak domestic demand and persistent power cuts will act as key headwinds, although export-oriented sectors are likely to benefit from a continued rebound in external demand.
- Activity data published by Stats SA today showed that manufacturing production contracted by 2.1% y/y in February, following a revised 4.2% y/y fall in January. (See Chart 1.) The outturn was far weaker than the Bloomberg consensus estimate of -0.3%. In month-on-month terms, output fell by 1.2%.
- While the headline figure was disappointing, the big picture is that the manufacturing sector has regained much of the lost ground since the height of the pandemic. A key reason is that the authorities avoided imposing harsh restrictions on manufacturing activity during a recent second wave of COVID-19. Apart from a ban on alcohol sales throughout January that weighed on food and beverage manufacturing (see Chart 2), the government imposed no other restrictions on the manufacturing sector. And businesses likely adapted to social distancing measures as well.
- Another reason was probably a supportive external environment. In February, auto manufacturing – cars are South Africa’s third largest goods exports – recorded double-digit growth for a third consecutive month. More generally, survey data suggest a pick-up in external sales in Q1. (See Chart 3.)
- But the manufacturing sector has faced some large headwinds. Perhaps the biggest is persistent power cuts. According to Eskom data, loadshedding was particularly severe in January which likely dragged on output in electricity intensive manufacturing sectors. Electricity availability improved in February, allowing food and beverages or pulp and paper production to be ramped up for instance.
- Looking ahead, external demand will probably hold up as trade partners’ economies continue to rebound in the coming months. There were some encouraging signs in the latest manufacturing PMI reading. (See Chart 4.) But a slow vaccine roll-out, continued power cuts and fiscal austerity will weigh on domestic demand. Overall, we wouldn’t hold our breath for a rapid recovery in manufacturing output this year.
Chart 1: Manufacturing Production
Chart 2: Food & Beverages Manufacturing (% y/y)
Chart 3: BER Manufacturing Survey (Index)
Chart 4: Manufacturing PMI & Production
Sources: Stats SA, BER, Absa, Refinitiv, Capital Economics
Virág Fórizs, Africa Economist, firstname.lastname@example.org