The data out of SA this week showed further pressure on industrial production, which can be attributed to weak demand and excess global capacity. In Zambia, the central bank tightened monetary policy aggressively to arrest the kwacha’s remarkable slide.
Meanwhile in the US, economic data continues to show signs of strength, which implies that a Fed rate hike in December is a real possibility. The data out of China continues to shows signs of deceleration. However, rebalancing is underway with the economy shifting towards a services led growth path. This is good for the Chinese economy, but its bad news for commodity producing countries.
SA’s mining production fell 4.8% y/y in September, following a 3.6% rise in August. We had anticipated that mining output would fall deep into negative territory as the favourable base effects associated with low volumes of platinum production last year during the strike are now beginning to fade. Nonetheless, they are still there, resulting in platinum output growth of 25% y/y in September.
The other important mineral commodities: gold (-4.9% y/y,) coal (-12.5% y/y) and iron ore (-17.9% y/y) all recorded declines that were worse than or equal to August’s readings. During 3Q 2015, mining production fell by 9.9% quarter-on-quarter annualised. This suggests that the sector will detract meaningfully from GDP. Looking ahead, we expect mining output growth to remain under significant pressure due to low commodity prices, corporate margins being squeezed and less favourable base effects. If commodity prices remain low in 2016, we see a significant risk of mines being put on care and maintenance to preserve assets until a price rebound occurs. SA’s manufacturing production increased by 0.9% y/y in September after recording a revised decline of 0.3% y/y in August.
The manufacturing sector has struggled in 2015, recording an average production gain of only 0.3% y/y for the first nine months of the year. In September, the petrochemicals and plastics (+5.5% y/y), food and beverages (+2.4% y/y) and wood and paper (+2.6% y/y) industries made the biggest positive contributions to growth. Meanwhile, vehicles and parts (-9% y/y) as well as metals and machinery (- 3.8% y/y) made sizeable negative contributions. The metals segment is a big concern as profitability is being hit by rising imports of low cost Chinese steel and weak global demand. Total production in this segment is down by an average of 1.1% y/y so far in 2015. The deterioration in vehicle production is also concerning as this segment performed very well earlier in the year. A combination of less favourable base effects and falling domestic vehicle sales are probably to blame for this. We expect that manufacturing production growth will remain muted for the rest of this year and into 2016. This is because manufacturing globally is facing huge challenges associated with excess capacity, falling prices and low demand.
Next week is going to be a busy one with the release of CPI and retail sales data as well as the SARB MPC interest rate announcement. CPI growth is expected to have remained stable at 4.6% y/y in October for a third straight month. We anticipate that a modest rise in food inflation will be counteracted by lower transportation inflation to keep the headline rate unchanged. SA’s retail sales growth picked up to an 18 month high of 3.9% y/y in August as sales of general dealers and clothing stores outperformed. In September, we expect a similarly strong growth rate due to favourable base effects and shifting demand toward non-durable and semi-durable goods, away from durable goods (expenditure on major durable goods including homes and cars is not included in retail sales). Finally, the MPC opted to leave the repo rate on hold at its last meeting in September and we expect the same decision on Thursday. However, the recent rand weakness will make this a close call. A rising inflation profile and expectations that the US Fed will lift interest rates soon leads us to believe that the SARB will hike domestic interest rates in the short term. At this stage we are leaning towards a hike in early 2016 as the SARB is likely to wait for the Fed to hike first and gauge the market reaction to this before moving again.
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