MANUFACTURING activity fell to its lowest level in 10 months during June, a key survey showed yesterday, suggesting that the economy's second-biggest sector may be contracting.

Manufacturing accounts for about 15% of overall output and formal jobs in the economy, and was the main driver of growth during the first quarter.

SA's purchasing managers' index, which is seen as a reliable health gauge for the manufacturing sector, dropped by 5,4 points to 48,2.

It was the first time since December that the index, sponsored by Kagiso Tiso Holdings, had fallen below the neutral 50 level which divided expansion from contraction.

"It's terrible news. I think in a nutshell it shows that manufacturing is in trouble once again," said Meganomics economist Colen Garrow.

The PMI s for China and Europe, SA's main trade partners, also contracted last month. Markit's e urozone m anufacturing PMI was unchanged at 45,1 last month - a two-year low - while the HSBC PMI for China fell to 48,2, its lowest since November.

Abdul Davids, research head at Kagiso Asset Management, said the downturn in SA could not be blamed entirely on weaker external demand from key export markets. They indicated a "sustained and worsening slowdown in domestic demand", he said.

Mr Davids also warned that the moderation in manufacturing output "dampened" the outlook for economic growth in the second quarter of

this year. Growth slowed to 2,7% in the first quarter of this year from 3,2% in the previous quarter. Most of it was driven by a strong rise in manufacturing output.

The new sales orders index, the largest weighted component of SA's PMI, fell by 5,2 points to 46,5. The business activity index recorded the largest decline, falling by nine points to 47.

"This component was last at these levels in mid-2011 when factory sector output was negatively affected by industrial action," Mr Davids said. Stanlib economist Kevin Lings said the drop in manufacturing activity reflected a combination of factors.

These included the European recession, the slowdown in Asian demand, the decision by Eskom to "buy back" electricity from large industrial firms, work stoppages and the closure of several platinum mines.

He also cited a slowdown in consumer consumption.

"This all suggests that the South African economy is losing momentum," Mr Lings said.

Mr Garrow said that the poor PMI reading supported the case for the Reserve Bank to trim interest rates at its policy meeting next month. Local money markets are pricing in a rate cut before the end of the year.

On a more positive note, input cost pressures moderated significantly, with the price component of the PMI losing 8,5 index points to reach 65,1.

"The continued decline in oil and other raw material prices seems to have outweighed the impact of the rand exchange rate, which continued weakening to the US dollar," Mr Davids said.