Interest Rate Debate

“The stronger than expected manufacturing figures is another curve ball in the interest rate debate as it indicates that GDP growth could be less affected by the electricity crisis” says economist, Fanie Joubert.  Read more about the background surrounding this statement and “the manufacturing sector which remains more resilient than expected, especially in light of the recent power problems.” More Resilient than Expected
9 April 2008

The manufacturing data for February were released by StatsSA today, reporting a rise in production of 3.8% y:y (seasonally adjusted), an improvement from the (downwards revised) 1.4% y:y rise in January. This figure was above our expected figure of 1.6% y:y, but remains below the 2007 average rise of 4.1%. The value of manufacturing sales also recorded a pick-up, rising by 15.8% y:y (seas) from 11.8% in January. This indicates that the manufacturing sector remains more resilient that expected, especially in light of the recent power problems.

  Index of physical volume for February:
Feb ’08
 Jan ’08
 Feb ’07
 % Change Y:Y
Actual 122.3
Seasonally adjusted 128.3


The manufacturing production clearly struggled during December 2007 and January 2008 as it recorded rises of only 0.2% and 1.4% respectively. This could have been worsened by electricity supply constraints. However, the pick-up in February indicates that the sector could be less affected than previously anticipated.    The sub sector for petroleum and chemical products  contributes almost a quarter to the manufacturing production basket and provided strong support during February, as it rose 9.5% y:y, up from the 4.5% in January. It was especially basic chemical (25.9% y:y) and plastic products (16.4% y:y) that reported strong gains. The food and beverage sub-sector (16.4% weight in production basket) also recorded a strong rebound and rose 5.5% y:y, from a contraction of 1.1% in January. Dairy products, beverages and the other food items rebounded strongly.  Weakness in the rand from the beginning of 2008 is inflating the value of manufacturing sales and supports manufactured exports, which in turn should provide momentum to the production side.
  Total value of Sales for February:
Feb ’08
 Jan ’08
 Feb ’07
 % Change Y:Y
Actual 101.6
Seasonally adjusted 106.1


On a seasonally adjusted basis, the value of manufacturing sales was R106.1bn during February; outperforming the previous record of just more than R100.0bn, set in January.  Major contributors to the record sales include basic iron and steel products as well as petroleum products. Both these sub-sectors have experienced phenomenal rises in input costs used during manufacturing; costs which are no-doubt being given through to consumers of these products. Mention should also be made of the inflating effect of the rand, which depreciated sharply versus most of our major trading partner’s currencies, especially from start of 2008.
Major Items:

Sector Feb ’08 Rbn Jan ’08 Rbn Feb ’07 Rbn % Change Y:Y
Basic Iron Products
Petroleum Products
Food and Beverages
Motor vehicles
Other 24.2
Total 101.6

Basic iron and steel, metal products and machinery sales recorded the strongest sales during February. Amongst its sub-categories, basic iron and steel products (22.4% y:y), structural metal products (21.6%) and general purpose machinery (13.1%) recorded the strongest rises. The price of steel rose strongly recently with reports of coking coal, a key ingredient in steelmaking, expected to rise by 150% to 200% based on various settlements.
The sales value of petroleum products continued to rise sharply after recording an average rise of 20.8% y:y during 2007 – keep in mind that the price of oil almost doubled during the scope of 2007. The value of sales for manufactured petroleum products rose by 29.9% in February (January: 33.5%), while basic chemical sales was up 37.1% y:y (Janaury:18.8%).  On the downside these increases are creating serious inflationary pressure in the economy, especially surrounding transport costs.
Food items remains the third largest sales item and the rise in this category jumped to 20.9% y;y (January: 16.6%). Grain mill product sales rose strongest (36.7% y;y), while meat, fish and fruit as well as diary products also recorded rises in excess of 20.0% y:y. Beverages is lagging somewhat as its value of sales rose by only 8.5% compared to February 2007. These strong rises are reflected in inflation figures (both CPI and PPI) and together with the transport costs mentioned above, create serious inflationary pressure in the economy.
There remains some discrepancy within the motor vehicles sub and other transport equipment sub-sector as parts and accessories and other transport equipments records strong rises, while the item for motor vehicles just managed to stay in the green.
The stronger than expected manufacturing figures is another curve ball in the interest rate debate as it indicates that GDP growth could be less affected by the electricity crisis, which in turn could lead to more reason for the SARB to hike rates. This said, the outlook for manufacturing continues to be seemingly dampened by uncertainty over electricity supply constraints and weaker consumer demand. Opposing the production side, manufacturing value of sales is growing at a healthy pace. The implicit inflation calculated from the data indicates acceleration from 11.0% y:y in January, to 11.4% in February, adding fuel to inflationary worries in the economy – providing support (again) for the SARB to raise rates.

Prepared by: Fanie Joubert (Economist)

Efficient Group

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