While the Steel and Engineering Industries Federation of Southern Africa (Seifsa) has welcomed Statistics South Africa’s (Stats SA’s) announcement that the economy and manufacturing grew by 3.3% and 8.1%, respectively, in the second quarter, it warns that the country desperately needs political and policy certainty to ensure sustainable growth.
Commenting on the data released by Stats SA on Tuesday – which also indicated a general 4.6% decline in spending on gross fixed capital formation and a 3.8% decline in metals and engineering production – Seifsa chief economist Henk Langenhoven said that, while sustained improvement in economic conditions was necessary to arrest the decline in the metals and engineering sector, it was equally important that gross fixed investment improved simultaneously.
“Surplus capacity in many important sectors makes gross fixed investment unnecessary at the moment, and the drawdown on inventories further suppresses the signal to restart,” he said.
Langenhoven added that the intensity of such a signal could be small in the sense that it could be a warehouse running empty, but it could also be significant as fears of possible misalignment between electricity generation capacity and demand begin to show.
The only positive point, he noted, was that a substantial drawdown had taken place on inventories, and that these would have to be replenished at some stage in the future, thus potentially generating demand. He cautioned that there was likely to be a time lag before this happened.
While welcoming the economy’s aversion of a recession, Langenhoven highlighted that, regrettably, this did not offer much consolation for the metals and engineering sector.
“This is because, so far, production in the three related sectors – mining, construction and auto manufacturing – has not yet fully recovered.”
According to the information released by Stats SA, mining sector production recovered from a very low base, while construction sector production recovered by 0.1% and automotive sector production has suffered, owing to greatly reduced demand for its products.
“However, export sales of basic metals – the only sub-industry to record improved performance – were slightly higher in the second quarter of 2016,” said Langenhoven.