Sentiment in SA’s manufacturing sector improved in the first three months of 2022, snapping a two-quarter losing streak, but the latest reading doesn’t fully factor in the war in Ukraine, according to an industry survey published on Tuesday.
Overall confidence measured by Absa’s Manufacturing Survey rose five points to 43 for the first three months of 2022, primarily driven by strong domestic and export sales, the bank said.
The survey, conducted by the Bureau for Economic Research (BER) at Stellenbosch University until the end of February, surveyed about 700 businesspeople in the sector.
The index, which gauges sentiment in the manufacturing sector, ranges between 0 and 100, with 0 reflecting an extreme lack of confidence and 100 extreme confidence where all participants are satisfied with current business conditions.
“The first quarter results show the sector is fairly upbeat, but there is some downside risk as the majority of the responses were received before the Russian invasion of Ukraine,” Absa Retail and Business Bank manufacturing sector head Justin Schmidt said in a statement on Wednesday.
“Although the official statistics for January and February were better than expected, the possibility of renewed pressure on still-strained global supply chains and, more importantly, increased prices of raw materials such as oil and agricultural commodities, were likely not considered by most respondents,” he said.
The war in Ukraine has prompted unprecedented sanctions against Russia, the world’s 11th largest economy before the action. The subsequent surge in energy costs and record prices for commodities such as fertiliser — Russia is a major supplier of both — raises the spectre of aggressive interest rate hikes to tame inflation. That, along with further supply-chain disruptions, could dent underlying demand.
The survey indicates that more than two-thirds of respondents viewed conditions as unsatisfactory, Absa economist Miyelani Maluleke said in a note. Firms that export will are likely to notice a cooler global economy due to the conflict, and IMF may downgrade its forecasts of global GDP growth again in April, she said.
“Manufacturers may have quite a different view of their prospects now,” said Maluleke.
Still, Absa notes that the year started on a reasonably positive note for manufacturing, and after an extended period of excess capacity and suppressed investment in the sector, this quarter’s indicator for fixed investment levels increased six points to the highest since the fourth quarter of 2007. Intended investment for the coming 12 months increased 12 points to the highest in 11 years.
“This is extremely good news for the industry and shows capacity to grow into the future,” said Schmidt.
Not only are manufacturers upbeat about overall fixed investment, they also expect demand to improve over the next 12 months.
The majority of manufacturers intended investing in inventory as well as machinery and equipment in the coming year, Absa said, noting that although output was higher, stock levels of finished goods relative to expected demand were deemed to be too low.
“In addition, the continued shortage of raw materials possibly results in producers meeting demand from existing stock and is inhibiting a ramp-up in production,” said Schmidt.
Numerous respondents flagged shortages of key input products and delays with especially imported products, due to long lead times on sea freight, as a concern.
Update: March 23 2022
This article has been updated with information on the war in Ukraine.
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