Factories Struggle as Power Cuts Threaten South African Growth

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Eskom Blackout
Regular blackouts have limited production just as Africa’s most-industrialized economy seeks to recover from the slowest growth since a recession in 2009. Photographer: Dean Hutton/Bloomberg

Rolling power blackouts in South Africa and the risk of strikes are weighing on manufacturing output, threatening already anemic economic expansion and clouding the central bank’s task as it seeks to tackle inflation.

A government report on Tuesday will probably show factory output increased 1 percent in March after two months of contraction, according to the median estimate of 17 economists surveyed by Bloomberg. The industry shrunk for seven of the last 12 months and the purchasing managers’ index signals a decline in April. While investors are pricing in a 25 basis-point rate increase by September, four-month forward-rate agreements have retreated over the past two weeks.

Regular blackouts have limited production just as Africa’s most-industrialized economy seeks to recover from the slowest growth since a recession in 2009. The slow growth from an industry that makes up 13 percent of gross domestic product may test the resolve of policy makers to act to curb inflation, seen accelerating through the top end of the Reserve Bank’s 3 percent to 6 percent target range.

The weak manufacturing industry “makes it very difficult for monetary policy,” Thabi Leoka, an economist at Renaissance BJM Securities, said by phone from Johannesburg on May 8. “I’ve already seen some growth forecasts of below 2 percent for this year and it’s quite clear that inflationary pressures are increasing.”

Double Wages

The PMI, an indicator of factory activity, fell to the lowest level in 11 months in April, signaling a slide in production. That may put at risk the government’s forecast of economic growth quickening to 2 percent this year from 1.5 percent in 2014.

A five-month work stoppage at platinum producers, followed by a strike at engineering companies cut 1 percentage point off economic growth last year, according to the central bank. While the biggest unions have yet to table demands before gold-industry wage talks that are due to start next month, National Union of Mineworkers General Secretary Frans Baleni said in March he may ask for a doubling of entry-level basic wages. Gold producers have said any pay increase must be linked to productivity.

“The risk of a mining-sector strike in the middle parts of this year is quite high,” Jeffrey Schultz, an economist at BNP Paribas Cadiz Securities in Johannesburg, said by phone on May 8. “Should we see a large strike in the gold sector similar to what we saw in the platinum sector last year, that will undoubtedly have a negative impact on manufacturing prospects.”

Price Pressures

Yields on government rand bonds due December 2026 rose three basis points to 8.09 percent as of 5:20 p.m. in Johannesburg on Monday. The rand lost 1.1 percent against the dollar to 12.0474, taking the drop this year to 4 percent.

While the central bank left its benchmark repurchase rate unchanged at 5.75 percent since July to help support the economy, rising gasoline, electricity and food costs are putting pressure on prices.

Inflation accelerated to 4 percent in March from a four-year low of 3.9 percent in February and the central bank forecasts it will exceed 6 percent in the first quarter of next year. The five-year breakeven rate, which measures expectations for price growth, last week climbed to the highest in 10 months.

“The manufacturing sector has no real momentum and in the wider economic picture things simply don’t look good,” Bart Stemmet, of NKC Independent Economists, said by phone from Paarl near Cape Town on May 8. “They will try to hold on as long as they can.”

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