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Manufacturing sector lacks demand

In sales terms, South Africa’s manufacturing sector swiftly recovered the territory lost as a result of the Covid pandemic, but the sector is still battling with the vexed problem of insufficient demand.

The latest data on capacity utilisation in manufacturing shows a continuation of the level of unutilised capacity (i.e. the average proportion of factories that are idle) at just above 22%, whereas this level was just below 20% prior to the pandemic. In the absence of an excellent export performance by the sectors involved with the production of agriculture & food and vehicles & vehicle components, unutilised capacity would have been even higher.

The Statistics SA survey on this indicators also determines the key reasons for the existence of unutilised capacity, with insufficient demand representing the most important one. It is noteworthy that a marked improvement occurred in this constraint on manufacturing activity between the second quarter of 2021 and the second quarter of 2022, but then higher interest rates started to take their toll.

It remains a point of concern that interest rates have risen to their highest level in 15 years, despite the fairly obvious lack of demand inflation in the economy. The current prime rate of 11.75% represents a 68% increase in the cost of capital (and credit) since the end of 2021, when restrictive monetary policy started to return.

Financial pressure on households has filtered down to manufacturers via muted consumption expenditure, which has prevented the sector from fully recovering its contribution to the country’s GDP after the end of the Covid lockdowns.

Prior to Covid, the manufacturing sector was well on its way to break through the R1 trillion level of value added, but this journey will only be able to resume again once a more benign macro-economic policy environment is in place, including lower interest rates and possibly also some anti-dumping duties aimed at cheap Chinese imports subsidised by its autocratic government.

Fortunately, two of the major manufacturing divisions, namely food & beverages and motor vehicles & parts, did manage to increase their capacity utilisation during the second quarter of 2023 (year-on-year). It remains a boon to South Africa to enjoy food security, with an agriculture sector that is also a significant generator of foreign exchange earnings.

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