The increase in producer prices in September 2017 provides some muchneeded comfort for producers, the Steel and Engineering Industries Federation of Southern Africa (SEIFSA) said recently.
Commenting on the latest data on Producer Price Index (PPI) for intermediate manufactured goods released by Statistics South Africa, SEIFSA Economist Marique Kruger said the industry can be encouraged by the latest data, which show the PPI for intermediate goods remaining in an expansionary terrain for three consecutive months.
“This indicates a continued improvement in factory gate prices and operating business conditions in the metals and engineering (M&E) sector. The data provide some relief for producers in the sector, who are beginning to derive the benefit of a modest recovery in domestic demand and declining costs,” Kruger said.
This was consistent with SEIFSA’s input cost index which decreased to 0.9 percent in September 2017 said Kruger, when compared to 1.7 percent recorded in August. She said the improvement in the latest PPI data was generally in line with an increase in the broader PPI for final manufactured goods, which recorded an annual change of 5.2% in September 2017, compared with 4.2% in August 2017.
The Statistics South Africa data showed that the PPI for intermediate manufactured goods rose to 2.1 percent in September 2017, up from 2 percent in August.
Kruger said that this was encouraging when viewed “against the backdrop of Finance Minister Malusi Gigaba’s bleak news in his Medium-Term Budget Policy Statement (MTBPS), which highlighted a tight economic environment characterized by poor tax efforts and tax morale, expanding government expenditure, ballooning deficits and high debt levels”.
However, Kruger cautioned that although the PPI for intermediate goods in the M&E sector provides a glimmer of hope, economic activity within the sector and broader manufacturing will remain constrained by depressed business and consumer confidence levels that have been linked to perceived policy, uncertainty and political turmoil. She said these will definitely keep producer prices volatile in the near term, thus making it very difficult for businesses to plan in advance and contain costs.
Kruger expressed grave concern about the latest economic and political developments, which have the potential to quickly reverse the positive growth trajectory recorded in the second quarter of 2017.
“In an atmosphere of generally low business and consumer confidence, low domestic demand, structural challenges and political uncertainty, the Finance Minister’s bleak news raised more questions than providing answers,” she said.
Kruger also raised disquiet about the oscillating rand’s effect on the economy, saying that a depreciating rand would be less beneficial for inflation, imported input costs and margins of companies in the M&E sector.
“The M&E sector is relatively small and open, hence volatility in price trends and the variables that impact the price trends does not augur well for it. A positive differential in the selling price inflation and input cost inflation needs to be maintained in order for the sector to stay attractive for existing and new investments,” Kruger argued.