In its manufacturing sector survey, the Bureau of Economic Research (BER) found that general business conditions continued to improve during the second quarter of the year, in South Africa.

A net majority of 8% of the BER’s manufacturing respondents reported year-on-year increases in production volumes, up from ‘no change’ reported during the first quarter and sharp declines reported during the final quarter of 2003.

More importantly, a net 17% of respondents expect further growth during the third quarter of the year.

“A pick-up in domestic sales and orders and a bottoming out in the weak export situation are behind this recovery in production,” the BER said in a statement yesterday.

Statistics SA’s manufacturing production figures for April showed year-on-year growth of 2,6%, which is consistent with the BER’s survey results.

The sustained recovery in the sector lifted the business mood – the manufacturing business confidence index edged higher, from 55 to 58.

However, the BER pointed out that, while the sustained recovery is encouraging, it evidently remains under pressure from the strong rand; alternatively, manufacturers’ adjustment to the stronger level of the exchange rate is a slow and arduous process.

“The improvement in domestic sales and orders should have been stronger in view of the otherwise booming retail conditions, and exports are not fully benefiting from the robust global economic conditions.

“This capped the improvement in business confidence. Manufacturers’ 12-month export expectations continue to be atypically bearish,” the BER explained.

The result has been continued retrenchments in the sector, albeit evident that the rate of retrenchments of workers is also slowing down, along with some lengthening in the number of hours worked per factory worker. A net majority of 10% of manufacturers reported retrenchments, compared to a net majority of 13% reporting so during the first quarter.

The April/May Investec PMI employment index readings indicated a stronger recovery in hiring.

“On the other hand, relatively strong growth in manufacturing fixed investment was sustained during the second quarter. Manufacturers appear to capitalise on the opportunities presented by the strong rand to import capital equipment.

“The underlying demand conditions and business outlook are also strong enough to justify a more bullish approach to capital expenditure,” the BER stated.

However, it added, it is fair to say that intentions could have been stronger in view of the otherwise booming retail and construction conditions.

Regarding costs and prices, the survey revealed that input cost inflation is on the rise, particularly in respect of raw-material purchase prices. The turnaround in the latter is probably tied to higher energy costs and international commodity prices and less support from an appreciating rand exchange rate.

Domestic selling price expectations also increased further, signalling acceleration in production price index inflation in the months ahead.

General business conditions are expected to improve significantly in 12 months – a net 25% of the respondents anticipate an improvement in general business conditions, compared with 3% previously (during the first quarter of 2004). The BER is confident that the recovery in manufacturing will continue over the next 12 to 18 months. However, for as long as the rand remains strong, this could inhibit the recovery.