Factory output shows stress

Factory output slowed in July, showing that one of the economy's key sectors remains under stress after last year's downturn and supporting the case for an interest-rate cut today.

A recovery in manufacturing helped lead the economy out of recession last year, but expansion has generally been sluggish because of depressed demand, slowing to 6.9% in the second quarter from 8.4% in the first.

Manufacturing output rose 7.5% by volume year-on-year in July, compared with an upwardly revised 9.3% expansion in June, Statistics SA said yesterday.

Nevertheless, July's production beat forecasts of a 6.0% rise in a Reuters poll last week.

Production volume rose by a seasonally adjusted 0.7% in July compared with June.

Output was up 1.5% in the three months to July compared with the previous three months on a seasonally adjusted basis.

The latest factory data - like recent figures that showed that the economy slowed in the second quarter while targeted inflation braked to a four-year low in July - backs the argument for an interest-rate cut when the Reserve Bank ends its latest monetary policy meeting today.

"It's still a bit of a slowdown from the previous month," said Brait economist Colen Garrow. "We need more robust growth than this and the [Purchasing Managers' Index] figures indicate that the recovery in manufacturing remains fragile."

Razia Khan, head of Africa research at Standard Chartered, said manufacturing's strength was surprising.

"But, at what point do the stronger rand and the higher input costs (labour, electricity) in the sector start to hurt?"

Khan said manufacturing alone would not be enough to change anything for the Reserve Bank today.

"They have to be forward looking and there are still hurdles ahead."

The Purchasing Managers' Index, a key indicator of industrial activity ahead of official data, edged up last month after two successive months below the critical 50 line.

Nineteen of 23 economists surveyed by Reuters on Friday predicted that the central bank would cut the repo rate by 50 basis points to 6%, adding to 5.5 percentage points of reductions from December 2008 to March this year.

Markets have priced in a rate cut, with bond yields falling sharply, and the rand has pulled back from the 2½-year highs against the dollar that it touched on Friday.

On Tuesday, the SA Chamber of Commerce and Industry, releasing its business confidence index, said it believed that there was a case for lowering the interest rate today to help stimulate economic activity.

The Reserve Bank has left rates unchanged at its monetary policy committee's two previous meetings, following 550 basis points of cuts from December 2008 to this March.

The cuts brought the repo rate down to 6.5%, its lowest level in three decades.