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South Africa Manufacturing Declines Unexpectedly in March

South African manufacturing output unexpectedly fell 2.2 percent in March and mining production shrank, prompting traders to increase bets that the central bank will cut interest rates this year.

Factory output declined after revised contraction of 2.8 percent in February, Pretoria-based Statistics South Africa said on its website today. The median estimate in a Bloomberg survey of 14 economists was 1.8 percent growth. Output dropped 2.5 percent in the month.

“It doesn’t paint a nice picture for manufacturing growth this year going forward,” Merina Willemse, an economist with Pretoria-based Efficient Group Ltd., said in a phone interview. “We’re going to see a smaller manufacturing growth number for the year than last year,” said Willemse, one of three economists to estimate a contraction.

A recession in Europe, which accounts for a fifth of South African exports, and local labor unrest have curbed growth and undermined consumer confidence. The Reserve Bank has kept the benchmark interest rate at a more-than-30-year low of 5 percent since July to boost spending. Manufacturing makes up about 15 percent of South Africa’s gross domestic product.

Mining production fell 3.5 percent in March from a year earlier compared with an estimate of 4 percent growth in a Bloomberg survey of seven economists. Factory output was partly affected by more holidays in March than the same month a year ago, the statistics agency said.

Question Marks

Yields on benchmark government bonds due December 2026 dropped 15 basis points, or 0.15 percentage point, to a record 6.60 percent by 2:20 p.m. in Johannesburg, according to data compiled by Bloomberg. The rand gained as much as 0.5 percent to 8.9596 against the dollar.

Forward-rate agreements, used to speculate on interest rates, starting next February dropped as much as nine basis points to 4.72 percent. That’s the lowest since July when the central bank last cut interest rates.

“There certainly are question marks about the sustainability of the small amount of growth we have had in the productive side,” Kevin Lings, an economist at Stanlib Asset Management in Johannesburg, said by phone. “If you combine that with the global environment, with central banks globally cutting rates, it would suggest that the Reserve Bank has scope to cut.”

While the rand’s 5.7 percent slump against the dollar this year should have boosted the competitiveness of the nation’s exports, waning demand from Europe has curbed growth in shipments, while the cost of imports have risen.

Exporters need take more advantage of a weak rand to compete internationally, Finance Minister Pravin Gordhan said in an interview today.

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