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Friday, September 12, 2008

South African Manufacturing Output Slows In July, Rand Decline Continues

South African manufacturing growth slowed to an annual 3.3 percent in July as higher interest rates continued to damp consumer spending. Growth in manufacturing output - which accounts for 16 percent of the South African economy - fell back from a revised 5.7 percent in June, according to data from Statistics South Africa earlier this week. Output fell a seasonally adjusted 0.4 percent in the month. Manufacturing output of food and beverages were down by an annual 3.3 percent in July, textile and clothing production dropped an annual 5.2 percent in July, while vehicle output declined 5.1 percent.

Sales of manufactured products have fallen considerably since the central bank began increasing the benchmark interest rate in June 2007. It has now been raised six times to the current 12 percent rate. The slowdown in manufacturing suggests that growth in Africa's largest economy, which rebounded to an annualized 4.9 percent in the second quarter from 2.1 percent in Q1, may now be slowing again.

The Reserve Bank left interest rates unchanged on Aug. 14 as consumer spending eased and it forecast inflation, which reached 13 percent in July, will slow significantly in the last quarter of the year. The bank will very likely begin lowering interest rates late in the first half of 2009.

There have been clear signs recently that domestic consumer demand has been weakening. Vehicle sales fell by an annual 30 percent in August, the biggest decline in 14 years. Retail sales fell for a fourth consecutive month in June, dropping by an annual 2.6 percent.

Falling Rand

South Africa's rand slipped back to its lowest level since May 2003 against the dollar following publication of the manufacturing report. This was the third day the rand has fallen as platinum, South Africa's most important export, slumped to a 20-month low and gold also declined. The rand droppedat one point by  as much as 1.5 percent to 8.3322 per dollar, touching the weakestlevel  since May 2003, although it was back at 8.3258 by 4 p.m. in Johannesburg. 

South Africa produces about 10 percent of the world's gold and almost 80 percent of its platinum, and the rand often  moves in tandem with these commodity prices. The movement in the value of the rand has been almost constant since late July now, as the dollar has risen steadily, reflecting in part declining global risk sentiment.

South Africa's business confidence index fell 11 points to 34, marking its eighth quarterly decline, according to the survey published by Rand Merchant Bank yesterday. The index is now at its lowest level since the first quarter of 2001.

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