Nov. 10 (Bloomberg) -- South African manufacturing contracted at a slower pace in September, indicating the economy may be recovering from its first recession in 17 years.

Factory output dropped an annual 11.4 percent after declining a revised 15.2 percent in August, Pretoria-based Statistics South Africa said on its Web site today. Production was expected to fall 13.1 percent, according to the median estimate of 13 economists surveyed by Bloomberg. Output rose a seasonally adjusted 3.1 percent in the month.

Manufacturing, which accounts for 14 percent of the economy, may rebound in coming months as the global recession eases and six interest rate cuts since December spur consumer spending. Reserve Bank Governor Gill Marcus, who took office yesterday, is under pressure from labor unions to lower rates again next week to help weaken the rand, which has surged 41 percent against the dollar since March, undermining exports.

“We still have a long way to go before we see positive numbers,” said Freddie Mitchell, an economist at Efficient Group in Pretoria. “The strong rand is hampering exports.” A recovery in output will also depend “on how well our trading partners do and if growth in Asia and Europe is sustainable.”

The Kagiso Purchasing Managers Index rose for a third month in October, indicating manufacturing output may rebound. Vehicle sales fell 16.9 percent in October from a year ago, the smallest drop since April 2008, an industry body said on Nov. 3.

Rand Strength

South Africa’s benchmark interest rate of 7 percent compares with 1 percent in the euro-region and between zero and 0.25 percent in the U.S., making local interest-bearing assets attractive to foreign investors and fueling a rally in the rand.

“There is a huge price to be paid for an exchange rate that prices South Africa out of international markets,” Economic Development Minister Ebrahim Patel told reporters in Cape Town today. “We need a competitive exchange rate.”

The rand was at 7.4189 against the dollar as of 1:36 p.m. in Johannesburg, little changed from 7.4168 before the data was released.

Manufacturers such as Seardel Investment Corp., South Africa’s biggest clothing and textile-maker, and Volkswagen AG, have cut output and fired workers this year as exports slumped. The rand’s gains is of “significant concern” because it’s made the local industry uncompetitive, Seardel said on Nov. 5.

To contact the reporters on this story: Nasreen Seria in Johannesburg at nseria@bloomberg.net

Last Updated: November 10, 2009 06:50 EST