Yearly growth in manufacturing produc-tion exceeded market expectations in July, beating the predicted 1.5% growth rate to achieve a substantially higher 5.4%, from the 0.5% observed in June, Statistics South Africa (Stats SA) reported earlier this month.

However, the Nedbank Economic Unit cautioned that manufacturing production and exports were likely to remain subdued in the short term, limiting the pace of overall economic activity to around a modest 2%.

“While growth remains contained, inflation poses a significant risk, given the strife with labour and a weak and vulnerable rand. Conse- quently, the Monetary Policy Committee will probably keep [interest] rates on hold until the second half of 2014,” it commented.

This position was iterated by private bank Investec, which asserted that, despite the rebound in manufacturing production in July, the underlying growth momentum in the sector remained relatively frail, as indicated by the softer performance for the first seven months of the year.

The manufacturing sector demonstrated ‘weak’ growth of 2.1% for the first half of the year, which was lower than the 2.8% year-on-year growth seen in the corresponding period last year.

“Consequently, the South African Reserve Bank is unlikely to change its monetary policy approach in terms of keeping interest rates unchanged until the end of 2014, as economic growth remains below potential,” the bank said.

The 5.4% year-on-year growth in headline manufacturing production for July was primarily attributable to the basic iron and steel sector, which grew by 7.9% year-on-year in July, compared with 6.4% year-on-year in June.

A sizeable contribution of 1.3% stemmed from the food and beverages sector, where production increased by 6.1% year-on-year from 3.5% in June.

This was followed by the petroleum, chemi-cal products, rubber and plastic products divi- sion, which saw a 3.9% production improve-ment that contributed one percentage point; the motor vehicles, parts and accessories divi-sion, which grew 9.9% and contributed 0.9 percentage points; the wood and wood prod-ucts, paper, publishing and printing industries, which grew by 5.6% and contributed 0.5 of a percentage point; and the glass and nonmetallic mineral products industry, which grew by 7.2% and contributed 0.4 of a percentage point.

Similarly, the seasonally adjusted manufac-turing production for the three months ended July increased by 2.2%, compared with the previous three months, with six of the ten manufacturing divisions reporting positive growth rates over this period.

This came as Stats SA reported a 3% increase in the seasonally adjusted sale of manufactured products for the three months ended July to R12.2-million, with all manufacturing divisions reporting positive growth rates over this period.

The manufacturing divisions primarily responsible for the increase in total manufacturing sales were the petroleum, chemical products, rubber and plastic products industry (3.9%, or R3.9-million); the basic iron and steel, nonferrous metal products, metal products and machinery division (3.4%, or R3-million) and the food and beverages division (3.1%, or R2.7-million).

Investec added that the improved activity in the manufacturing sector came on the back of both external and internal demand dynamics, citing recent data on the economic situation in the major developed economies, which suggested that the gradual recovery had continued into the third quarter.

“Strengthening offshore demand, coupled with the lag effects of the weaker rand, is becoming increasingly evident in the South African data. The weaker currency has also played a part in raising domestic demand for locally manufactured goods by inflating import prices at a time when consumers are experiencing financial pressure,” the bank noted.

Looking ahead, Nedbank said that labour-related production disruptions were likely to have a negative impact on output growth in the short term, while the sector would continue to face subdued demand conditions.

“In the large export-orientated industries, output growth will be contained by the weak growth in the eurozone, a more measured Chinese economy and weaker international commodity prices.

“However, the weaker rand will temporarily offset some of the pressures,” it said.

It further cautioned that cost pressures would remain elevated, with high electricity costs, rising unit labour costs and expensive trans-port and logistics, while, in the inwardly focused industries, demand conditions would be broadly softer as household spending mod- erated and fixed investment activity remained weak.