The Manufacturing Circle's newly launched Manufacturing Circle Investment Tracker (MCIT), released on Friday, stood at 70.3 points in the third quarter, well above the neutral 50-point level.

The MCIT, which surveys local manufacturing enterprises, is aimed at assessing sentiment in this vital sector of the economy, in both the index period, and projecting forward into the following quarter.

Plant and equipment as a component was the largest contributor to the expansion of the index in the third quarter. This was followed by inventory levels, which is an important contributor to the index and highlights demand conditions and expectations.

Surveyed manufacturers indicated that their spending on investment was within planned budgets, suggesting that actual operating conditions in the sector were conducive to the implementation of plans.

These positive results were in response to the weaker exchange rate, encouraging an increase in exports, and increased localisation facilitated bygovernment and quasi-government customers.

Further, Manufacturing Circle executive director Philippa Rodseth said that while the Department of Trade and Industry’s (DTI’s) Manufacturing Competitiveness Enhancement Programme, which offered manufacturing incentives, had been encouraging investment and showed clear benefits, it had been suspended in October 2015 owing to insufficient funds.

Trade and Industry Minister Dr Rob Davies in September announced that the R1-billion loan component of the MCEP would be reopened.

“This needs to be fully restored, and we are hopeful that the DTI will be able to make a positive announcement soon,” she noted.

While the first MCIT data was encouraging, the Manufacturing Circle noted that the industry remained fragile. Looking ahead to the fourth quarter, the MCIT reveals that manufacturers foresee an increase in investment spending, but at a lower level. The lower projected index number is 58.7, and the likely fall is the result of an expected contraction in inventories. This reflects destocking by manufacturers as they move into the final quarter of the year.

In addition, “there is clearly some nervousness [about] the political climate in South Africa, and concern over the decisions we will soon see from the ratings agencies, which could impact long-term investment decisions in the manufacturing sector,” said Rodseth.

“What we aim [to do] through this new research is to achieve a continuing insight into the thinking of manufacturers and today’s launch will give an extra set of data for government, economists, businesses and all who are trying to understand the dynamics in the local economy.”

MCIT SURVEY FINDINGS
The property (building) subcomponent showed a strong positive reading in the third quarter, recording 68.2 points for spending on expansions, while spending on maintenance was recorded at 66.7 points.

This can be attributed to the need to expand capacity to meet growing demand. However, looking into the fourth quarter, spending on expansions falls by 8.7 points, while spending on maintenance and replacement falls by 4.8 points to 61.9.

Spending on plant and equipment expansion recorded a strong 68.2 points in the third quarter, above maintenance and replacement, suggesting a need for increased manufacturing capacity.

However, expectations showed a strong downward trend. In the fourth quarter, spending on plant and equipment expansion is expected to fall by 15.9 points – the highest decline within the MCIT subcomponents.

Spending on research and development recorded a strong 64.3 points over the third quarter as manufacturers focused on looking for ways to improve process and productivity. More than any of the other segments, this indicates plans for manufacturers to modernise and stay competitive.

However, moving into the fourth quarter, manufacturers expect investment in research and development to stay unchanged, recording a neutral 50 points.

The human capital subindex, reflecting spending on people (wages and training) recorded a strong expansion, with the level at a high 69.1 points. This suggests rising levels of employment in the manufacturing sector, consistent with the drive to expand capacity.

However, this was in direct contradiction with Statistics South Africa’s recent figures on unemployment.

The human capital subindex is expected to decline by 12 points in terms of wages and 7.1 points in terms of training and development in the fourth quarter. While expansion in employment is still expected, it will be at a much slower pace in the final quarter.

Inventory levels recorded marked expansion, recording 61.4 points in the third quarter. However, the fourth quarter is expected to show a strong decline of 13.7 to 47.4 index points. The inventory index falls below the neutral 50-point mark suggesting a contraction.