South Africa's factory output shrunk less-than-expected in September, suggesting the sector is on the mend although a recovery is expected to be slow. Statistics South Africa said on Tuesday manufacturing output shrunk by 11.4 percent year-on-year in volume terms in September compared with a revised 15.2 percent contraction in August. A Reuters poll showed analysts expected a 13.0 percent fall.
On a monthly basis, factory production rose by a better-than-forecast seasonally-adjusted 3.1 percent in September compared to forecasts of a 0.9 rise. Output was up 2.6 percent in the three months to September compared with the previous three months. "This is confirmation that we probably have seen the worst in the current slump. The PMI numbers have been signalling that we're heading towards some improvement," said Monale Ratsoma, economist at Thebe Securities.
The purchasing managers' index climbed to 45.9 in September and hit a 1-1/2 year high of 47.6 in October, inching closer to the 50 breakeven mark. Ratsoma said manufacturing output on an annual basis would likely continue to fall but at a slower pace and could start turning positive in the middle of next year.
The sector is the second biggest in the economy, contributing about 14 percent to GDP. It has been hard hit by the global economic downturn and helped drag the local economy into its first recession in 17 years. The monthly and quarterly increases in output bode well for third quarter GDP numbers, said Christie Viljoen, economist at NKC Independent Economists.
"This should give us a bit more optimism for the third quarter GDP numbers ... it could even confirm that earlier rate cuts have been enough to get the economy going," Viljoen said, seeing the central bank leaving rates steady next week. The Bank has cut interest rates by 5 percentage points since December to help stimulate growth. Its monetary policy committee meets from Monday, with the decision due on Tuesday.
But Nedbank economist Johannes Khosa said although the manufacturing data indicated the worst of the recession was over, demand-side indicators were showing the economy was still weak, supporting the case for an interest rate cut next week. "Other indicators, like retail sales, credit numbers, still reflect that the economy, in general, is still weak. So based on that, and lower inflation, we still expect that the Reserve Bank may opt to cut rates again at next week's meeting."
Consumer spending remains depressed and growth in demand for credit is weak as households and company finances are under pressure. The rand was trading slightly weaker at 7.4450 against the dollar at 1332 GMT, from 7.4075 before the data was released at 1100 GMT. The yield on the 2015 government bond rose to 8.29 percent from 8.225 percent.