News this week on how SA's key mining and manufacturing sectors performed in June is unlikely to provide much encouragement for the outlook on the domestic economy.
Figures due from Statistics SA on Wednesday are expected to show that growth in factory output slowed during the month, while the mining sector contracted.
Given that these sectors together account for a fifth of overall economic output, the data will provide insight into the likely pace of growth in gross domestic product (GDP) during the second quarter. Economists are reluctant to forecast mining production figures, which are exceptionally volatile.
The sector managed to notch up growth of 0,8% year on year in May after 10 successive months of declines, but economists are sceptical that the pick-up will last in the face of waning global demand and falling commodity prices.
"Looking at the underlying vagaries we don't expect anything positive," said Absa Capital economist Ilka van Zyl, who added that the domestic mining sector was in a "shocking state".
The manufacturing sector will remain hostage to developments in the global economy, which is slowing. It is under heavy pressure from an evolving recession in Europe, which takes most of SA's manufactured exports. Consensus forecasts from Bloomberg predict that growth in factory output slowed to 3.1% year on year during June after an unexpectedly strong 4.2% rise in May. The monthly increase is set to decline to 0.4% from 2.7% in May
The numbers could be even worse, given that a key survey for the sector suggested that activity contracted during June. SA's purchasing managers' index declined to its lowest level in 10 months in June, slipping below the neutral 50 level, which divides expansion from contraction, for the first time since December.
"I think we can expect a weak reading, which will drag the second-quarter GDP number lower and put the market on alert for another rate cut," said Meganomics economist Colen Garrow. "It could well be a number that shocks to the downside." Mr Garrow sees growth in manufacturing production slowing to 2.3% year on year.
The Reserve Bank unexpectedly cut its key repo rate by half a percentage point to 5% last month, saying it wanted to help shield SA from the effects of a global slowdown. Local markets are pricing in a good chance that interest rates will fall again before the year-end, but most economists believe this is unlikely.
"The risks (to manufacturing output) are very high due to sluggish global demand, and we don't think the domestic economy is strong enough to support the sector," said Standard Bank economist Thabi Leoka.
Mining related products like heavy machinery and basic iron and steel are the main drag on manufacturing production, while buoyant vehicle sales are helping to offset some of that effect.
Ms Leoka sees factory output slowing to 2.6% year on year during June. It was alarming that the sector shed 111,000 jobs since the start of this year, she said.
The Reserve Bank will tomorrow release figures on where its gold and foreign exchange reserves stood at the end of last month. Little change is expected, apart from the valuation effects of higher gold prices and a stronger dollar.
Tomorrow, the South African Chamber of Commerce and Industry will release its business confidence index for last month. The measure nudged up in June after hitting a 10-year low in May.
Original Article Posted On: http://www.bdlive.co.za