High rates hit growth

Factory output growth slowed to 3,3percent year-on-year in July and shrank by 0,4percent on a monthly basis, pointing to a sector struggling under higher interest rates.

Factory output growth slowed to 3,3percent year-on-year in July and shrank by 0,4percent on a monthly basis, pointing to a sector struggling under higher interest rates.

Statistics SA said yesterday annualised growth eased from 5,7percent and stood at a seasonally adjusted 0,2percent in the three months to July compared with the previous three months.

"The real data to focus on is the seasonally adjusted manufacturing output in the three months to July and the 0,4percent month-on month contraction," said Razia Khan, head of regional research for Africa and Standard Chartered.

"(These show) manufacturing in South Africa is weak. So more gloomy news on the economy."

Manufacturing is the second biggest contributor to gross domestic product. The sector rebounded to 14,5percent growth in the second quarter of 2008 after contracting in the first quarter on the back of the electricity crunch.

The Purchasing Manager's Index (PMI), which points to underlying activity in the sector, has remained under pressure, falling to a record low in July partly due to higher interest rates.

The reserve bank has lifted the repo rate by five percentage points to 12percent between June 2006 and June 2008 but kept it steady last month.

Market reaction was muted, with the rand largely unchanged at R8,24 against the dollar at midday compared to R8,25 before the data was released.

Citadel economist Dave Mohr said he expected manufacturing to remain weak for the rest of the year. "In the second quarter we saw a good performance in manufacturing, but against the background of slowing demand locally and in the international market, it will be difficult to sustain," he said.

Manufacturing production rebounded to 14,5percent in the second quarter of 2008 after contracting in the first quarter on the back of Eskom's woes.

George Glynos, managing director of Econometrix Treasury Management, said the latest figures were broadly in line with expectations. "We were looking for a little bit more than that, but not much. I don't know how much there is to say about this data, other than that we still don't see a perfect correlation with the PMI, and that there is still some resilience that may now be starting to come through as a result of some rand weakness."

The Purchasing Managers' Index - which points to trends in manufacturing ahead of official data - fell to 42,8 in July from 43,8 in June. It recovered to 47,0 in August. - Reuters, I-Net Bridge

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