Manufacturing sector continues to shine

At its current rate of growth, South Africa’s manufacturing sector is destined to crack the R3-billion level in sales values during 2023. Not only have the country’s factories shrugged off the effects of the Covid pandemic, but they have entered a new phase of expansion.

In May, nominal year-on-year growth in manufacturing sales outperformed the consumer price index (CPI) for the 12th month in succession, with an average growth rate for the 12 months ended May 2023 of 13% - more than double the latest CPI reading. The graph depicts real sales trends, based on a 4-quarter moving average, which serves to eliminate seasonal volatility.

Until recently, manufacturing volumes have not been able to emulate the sterling performance of the sector’s sales values, but this has now also started to move into growth territory. May 2023 was the second month in succession that total manufacturing volumes expanded.

The resilience of the manufacturing sector is especially encouraging against the backdrop of permanent electricity rationing and the highest interest rates in 15 years, which have served to stifle downstream demand for many manufactured goods. Closer scrutiny of the different manufacturing divisions and groups reveals a striking upward trend for machinery & equipment and motor vehicle parts & accessories, as illustrated by the table.

Boost from supply-chain disruption

One reason for the exceptionally strong performance of the country’s manufacturing sector is related to the global supply-chain disruption caused by the Covid pandemic and then exacerbated by the Russian military invasion of Ukraine. These unfortunate incidents led to temporary scarcities for a large variety of imported goods, which, in turn, necessitated a search for locally produced products, both for intermediate application in production and for direct supply to retailers and wholesalers.

An element of Covid-induced import substitution therefore occurred, with many retailers and wholesalers sticking to their new-found local suppliers after the end of the lockdown restrictions.

A second reason is related to the strength of the US dollar over especially the past 18 months, which has enhanced the international competitiveness of South African exporters, who sell mainly in US dollars, Euros and pound sterling, but bank locally in rand.

An added bonus of the US dollar-induced weakness of the rand since 2022 is an incentive for the retail and wholesale sectors to rather source locally, as imported goods have become significantly more expensive in rand terms.

In the event of the country’s manufacturing sector continuing on its merry way of rising sales values, South Africa may continue to avert a recession this year.