As had been broadly anticipated based on May’s ZAR18.7bn trade surplus as well as recent upbeat PMI numbers, May manufacturing data registered a 4% y/y increase, the best growth level since July 2015.
Month-on-month, production accelerated by 6.3% (unadjusted) and 1.6% on a seasonally adjusted basis.
The data confirms our expectation of a gradual narrowing of the current account deficit, with a weaker rand providing some tailwind to exporters. The narrowing deficit is as much about import compression though, and we expect that domestic manufacturers are also taking advantage of import-substitution (buying locally made goods rather than imports).
Much of the improvement was driven by petroleum and chemical production which was up 9% y/y, wood and paper products (6.8), food and beverages (2%), motor vehicles and parts (4.2) and basic iron and steel products (1.5%) which turned positive after 9 consecutive months of contraction.
A lower oil price and modest recovery in the rand should see momentum continue in petroleum production, although a low base from capacity having been offline last year is somewhat flattering the growth rate.
Similarly, the growth in steel and metal products is off a very low base and the overall growth needs to be seen in the context of weak domestic demand as evidenced by food and beverage production which was up a less impressive 2.0% y/y.
Conditions for manufacturers remain tough, and we are again facing the prospect of industrial action in the sector. While we are encouraged by the May performance, manufacturing data for the balance of the year is likely to be choppy, even in the absence of strikes.
Jason Muscat, FNB Senior Industry Analyst