MANUFACTURING production slowed more sharply than expected during December, official data showed on Thursday, but the economy’s second-biggest sector is expected to gain traction in the coming year.

An improvement in the global environment is likely to boost demand for locally manufactured exports, which will also benefit from the rand’s sharp depreciation in the past couple of months.

That is good news for the domestic economy, which is expected to expand at a sluggish pace this year, after notching up growth of about 2.5% last year.

Manufacturing output increased 2% in the year to December, down from an upwardly revised 3.7% in November, and below consensus estimates for an increase of 2.6%.

During December itself, production dipped by 2.2% after a 2,6% rise in November, Statistics South Africa said.

But in the final quarter of the year, production was up by 1.6% compared with the previous quarter — which will have supported economic growth during that period.

"I am a little more upbeat," said PG group CEO and chairman of the Manufacturing Circle Stewart Jennings. "We seem to be doing a bit better and one of the main reasons is because the rand is more competitive, which is giving us a boost on exports." The rand has depreciated by nearly 5% against the dollar so far this year, and weakened by 4.4% against a trade-weighted basket of currencies.

"There may be continued weakness in manufacturing in the near term but looking beyond the first quarter of this year there is reason to be more optimistic," said Cadiz Asset Management economist Adenaan Hardien.

"The combination of current rand weakness and the fact that global conditions are looking a bit more positive is helpful.… I think for the year as a whole we will be stronger," said Mr Hardien.

Growth in manufacturing over the whole of last year slowed to 2% from 2.6% in 2011, the figures from Statistics South Africa showed.

Other data released yesterday showed that utilisation of production capacity by large manufacturers jumped to 83.8% in the final quarter of last year — a four-year peak. It was 80.6% in the same quarter of 2011.

Stanlib economist Kevin Lings said utilisation at this level would normally lead to a rise in investment activity. Expansion of local business into Southern Africa, increased infrastructure spending and a steady improvement in world economic conditions should support manufacturing this year and next year, he said.

The dip in manufacturing output in December was flagged by a decline in South Africa’s purchasing managers' index (PMI), seen as a reliable health gauge for the sector. The PMI increased last month, pointing to a likely improvement in activity.

Business confidence picked up last month, according to an index from the South African Chamber of Commerce and Industry (Sacci).

The confidence index nudged up to 94 points from 93 points in November — which was its highest level since August last year.

Sacci said in a statement that the increase suggested the index might recover more strongly this year. "However, a serious commitment by government and labour towards economic improvement is key to ensuring a conducive environment for the private sector to play its role," Sacci said.