Picture: THINKSTOCK
Picture: THINKSTOCK

ACTIVITY in the manufacturing sector improved last month as the end of a wage strike sector led to a return to production, a key survey showed on Monday.

However, economists warned there was little to cheer about as the survey showed the sector was struggling, suggesting its contribution to economic growth will be muted.

Manufacturing is the economy’s second-biggest sector and its weak performance supports the view that economic growth will be well below 2%. South Africa needs growth in excess of 5% a year to create jobs for the millions of unemployed.

The Kagiso purchasing managers index (PMI), which indicates activity in the manufacturing sector, increased by 3.1 points to 49 last month. August marked the fifth month of contracting manufacturing activity as only a reading of above 50 indicates expansion.

Weak global and domestic demand is limiting manufacturing production growth, although production stoppages brought on by wage strikes have had the greatest effect on activity for the better part of this year.

Both a five-month-long strike at platinum mines and a month-long strike by steel and engineering workers constrained output in the manufacturing sector.

The Kagiso PMI’s outcomes have even been reflected in manufacturing production data, which Statistics South Africa releases each month.

Manufacturing production fell 1.9% year on year in April, declined again in May, by 3.8%, and then rebounded in June to post slight growth of 0.5%.

Manufacturing output data for July could disappoint given that this was the period during which workers in the steel and engineering industries were on strike.

"In terms of actual output for July, this is likely to have come under strain following marginal growth in June," ETM Analytics economist Manisha Morar said.

"Generally, domestic supply-side constraints alongside lacklustre aggregate demand suggest that production growth stayed under pressure in the third quarter," Ms Morar said.

The improvement in the PMI was driven by sharp increases in business activity and new sales orders.

The new sales orders subindex rose from 45.4 in July to 49.8 last month — its highest level in six months — while the business activity subindex shot up by eight points to 47.4 in August.

FNB Economics economic analyst Alex Smith said the rise in the business activity subindex implied that only a small majority of manufacturers saw business activity slow last month and that, in turn, it was likely that the pace at which manufacturing production was declining slowed substantially between July and August.

Mr Smith was expecting new orders to increase gradually in the coming months, which would help manufacturing output improve towards the year end.

However, another subindex showed the extent to which local producers were still grappling with rising administered costs. The price index rose for a third consecutive month to reach 77.3 last month from 76.5 in July, mainly due to sharp increases in the prices of petrol and diesel during the month.

This pressure should lessen somewhat given that petrol prices are scheduled to drop by 67c/l on Wednesday.

Producers were also slightly more optimistic about the future as the index measuring expected business conditions in six months’ time jumped to 56.3 index points from 55.4 in July.

The employment subindex also improved but remained well below 50 — indicating that the sector will not add jobs significantly.

Kagiso Asset Management head of research Abdul Davids said the local Kagiso PMI continued to diverge from international PMI figures‚ with the US flash PMI rising to 58 index points, while both the eurozone and Chinese PMI flash readings remained above the key 50-point level last month.