SARB might hike rates by 25 bps

Manufacturing up 3.4% (3mma)

Manufacturing production in October surprised us to the downside, although it was in line with consensus at 2.2% y/y, down from September’s rebound of an upwardly revised 8.6% y/y (previously: 8.0%). Month-on-month, manufacturing grew by 0.5% versus the Bloomberg consensus estimate of 1.5% m/m.
We had assumed the post-strike catch up would be spread over three to four months, which has indeed been the case, and growth averaged 3.4% y/y on a three month moving average basis (Aug – Oct), which was in line with our expectations, up from -4.0% y/y (May - July).
However the recovery in manufacturing appears to be tapering off, despite the fact that the mining sector seems to have not yet returned to full capacity. PGM production is still well below levels seen in previous years (fig 7) In any case, looking at a breakdown of the drivers of growth over the last 3 months, it appears that the recovery has been almost completely driven my motor vehicle production (figs 4 &5) as opposed to being on the back of a recovery in mining.
We assume the recovery in motor vehicle production is in large part related to the Mercedes Benz factory upgrades and that consequently growth in motor vehicle production will continue to benefit from base effects until at least July next year. The sharp slowdown in vehicle growth from 123.8% y/y in September to 10.3% y/y in October is due to the change in base effects from positive to negative, stemming from motor vehicle strikes in September 2013 and the rebound in October 2013 (fig 1).
Growth YTD of 1.5% (seasonally adjusted) is below comparative 2013 growth of 2.3% (fig 2). Looking at sector level growth both YTD (fig 6) and the 3mma of the Y/Y growth rate (fig 8) we note the significant contribution to the recovery by motor vehicles, and more marginal contributions by furniture, machinery and textiles.
Figure 4 shows that the slowdown in manufacturing in October was relatively broad based; textiles and clothing grew by 7.9% y/y, down from 8.1% y/y in September; radio, TV and communication grew by 7.5% y/y, down from 18.6% y/y; and furniture grew by 4.9% y/y, down from 19.0% y/y (fig 4). The only category to grow by a higher y/y rate in October compared with September was the wood and wood products category, which rebounded to 0.9% y/y in October, from -3.2% y/y in September.
Today’s manufacturing release continues to demonstrate that production is normalising post the first eight months of strike affected data. Concerns, however, stem from the broadly lower global commodity prices and the impact this may have on growth in the mining sector. Eskom’s supply constraint is also expected to limit expansion of the sector for at least another 3 to 4 years.
Today’s manufacturing and mining production data, alongside the positive implications of a lower oil price for the SA consumer, increases the risk that growth will take longer to rebalance, and that pressure on the current account deficit will be sustained. The risks to the currency are heightened under this scenario, and we maintain our view that the SARB will have to hike by 25bps in 2015 to restrain an uncontrolled and rapid depreciation of the rand.

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