Thanda Sithole | Manufacturing output ends 2Q24 on a weak note, recovery expected in 2H24

Total manufacturing production, not seasonally adjusted, fell sharply by 5.2% y/y in June, worse than the downwardly revised decline of 1.2% y/y (previously 0.6% y/y) in May. The outturn was materially worse than the consensus prediction of a moderate 0.9% decline. Seasonally adjusted output shrank by 0.5% m/m, better than the 3.6% monthly decline in the prior month. This was already reflected by the manufacturing PMI business activity, which remained in contractionary territory at 36.3 points during the same month.

Today’s manufacturing data indicates that output expanded by 0.9% in 2Q24 after shrinking by 1.2% in 1Q24. This supports our long-standing view that GDP likely rebounded in Q2 after contracting by 0.1% in Q1. In addition, the significant annual decline in manufacturing output is consistent with our slightly below-consensus GDP growth forecast of 0.9% for 2024. We will closely monitor the remaining high-frequency data for June over the next two weeks to gain a clearer understanding of the economy's performance in Q2.

Overall, the weak manufacturing output performance, despite easing energy and supply chain constraints, underscores the lacklustre demand for manufactured products, as reflected across various manufacturing divisions outlined below.   

Outlook

Manufacturing output declined by 0.5% in 1H24 compared to the same period last year, falling short of our conservative projection for average annual growth of less than 1% this year. This decline has largely been attributed to weak performance in sectors such as motor vehicles, parts and accessories, and other transport equipment; basic iron and steel, non-ferrous metal products, metal products, and machinery; furniture and “other” manufacturing as well as textile, clothing, leather, and footwear.

While manufacturing activity underperformed in the first half of 2024, some recovery is anticipated in the second half. The manufacturing PMI began the third quarter on a positive note, rising to 52.4 points in July from 45.7 in June. The business activity index (a proxy for output) also increased to 50.8 in July from 36.3 the previous month, and new sales orders (a proxy for demand) rose to 55.4 in July from 37.9 in June. Additionally, manufacturers have shown slightly more optimism about improvements in operating conditions in the near term.

Selected sector analysis

Among the five major manufacturing divisions, the largest drag on total manufacturing output came from the basic iron and steel, non-ferrous metal products, metal products, and machinery, which declined by 8.4% y/y in June, following an 8.3% decline in May. This was followed by:

• Motor vehicles, parts and accessories, and other transport equipment which declined sharply by 15.6% after declining by 11.7% in May. Within this division, motor vehicle production was down by 9.8%; parts and accessories declined by 19.3%, and production of bodies for motor vehicles, trailers, and semi-trailers also declined by 30.3%.
• Food and beverages output declined by 6.0% after expanding by 6.9% in May. Production of meat, fish and fruits fell by 3.2%; dairy products shrank by 7.1% y/y, and other food products contracted by 14.7% y/y.

There was some growth among major divisions:

• Petroleum, chemical products, rubber, and plastic products increased by a further 1.3% y/y after increasing by 3.4% in May, supported by increased activity in basic chemicals and plastic products.
• Wood and wood products, paper, publishing, and printing increased by another 1.1% y/y in June after expanding by 4.0% in May, supported by increased activity in printing and recorded media, products of wood as well as paper and paper products.

* Thanda Sithole is FNB Senior Economist.