South Africa’s manufacturing production fell by 1.4% year-on-year in May, owing to lower production in the basic iron and steel, nonferrous metal products, metal products and machinery sectors, where output contracted by 5.8%, as well as a 4.6% contraction in petroleum, chemical products, rubber and plastic products, down 1.1 percentage points.

Seasonally adjusted manufacturing production also decreased by 0.3% in the three months to May 31, compared with the previous three months. Five of the ten manufacturing divisions reported negative growth rates over this period.

The largest negative contributions to the 0.3% quarter-on-quarter decrease were made by the basic iron and steel, nonferrous metal products, metal products and machinery sectors, where output contracted by 1.9%; petroleum, chemical products, rubber and plastic products, which recorded a 1.8% decrease in output; and the food and beverages sector, which recorded a 1% contraction in output.

Specialist banking group Investec economist Kamilla Kaplan noted that inconsistent electricity supply, rising production costs and subdued aggregate demand, had impacted on production.

She added that the South African Reserve Bank (SARB) was due to make its next interest rate announcement on July 23 and, paired with the challenging global backdrop, would pose downside risks to the expansion of the domestic industrial sector, which was already affected by structural constraints.

“On the inflation front, although the trade-weighted rand has depreciated by 4.3% since the Monetary Policy Committee last met, commodity prices have retreated. In addition, the National Energy Regulator of South Africa rejected State-owned power provider Eskom’s application for a further increase in electricity tariffs.

“The combination of these growth and inflation considerations support an unchanged verdict. However, given the SARB’s hawkish policy communications to date, a 25 basis point hike seems most likely in July,” Kaplan said.

Financial services firm BNP Paribas Cadiz Securities economist Jeffrey Schultz said the contraction in manufacturing output was “disappointing” as the firm had expected production to increase by 0.9% year-on-year in May.

“The outlook for local manufacturing remains riddled with obstacles from electricity supply shortages, rising input costs and weak demand conditions,” he added.

Kaplan agreed, noting that the [current economic state] would continue to hamper the performance of the sector in the coming quarters, with risks balanced to the downside. “Only modest growth in domestic demand is expected, as consumers are highly indebted and are experiencing rising living costs. External demand is tenuous,” she added.

“We expect these constraints to keep momentum growth weak over the medium term, which is backed up by last week’s release of the manufacturing Purchasing Managers Index (PMI), which showed a moderation in new sales orders and a PMI ‘leading’ indicator that remains below its expansionary level of one,” noted Schultz.