Speaking at the launch of its authoritative State of the Metals and Engineering Sector Report 2018 to 2019 in Johannesburg, SEIFSA Chief Economist Michael Ade said the metals and engineering sector is poised for 1,1% growth this year, following an impressive 2,7% growth in 2017.
Ade said this prognosis is supported by global economic growth, which remained fairly robust in 2017, aided by a rebound in investment and trade, against the backdrop of benign financing conditions, generally accommodative policies, improved confidence and the dissipating impact of the earlier commodity price collapse.
He said 2017 was a much better year for the metals and engineering sector, which rebounded from the recession in preceding years, registering a 2.7 percent growth “despite facing serious structural challenges”. He said the momentum was expected to continue in 2018.
“Despite the current potential to improve on margins in the M&E sector being fragile due to domestic headwinds, all indications are that the sector will record another increase in growth during 2018, barring any major disruptions to production,” Ade said.
Commodity prices recovered last year and are expected to gain momentum in 2018, thereby strengthening exports and improving growth prospects for commodity exporters in emerging markets commented Ade. “However, it is unclear how long the positive outlook will continue, given the volatility in commodity prices,” he said.
Ade said downside risks include disorderly financial market movements, negative effects of borrowing costs, as well as rising trade protectionism or geo-political risk which could also negatively affect confidence, trade and overall economic activity.
He said the prognosis also aligned with the outlook for an improving – but subdued – domestic growth underpinned by positive projections for fixed capital formation, better domestic trade conditions and reduced exchange rate volatility.
“Our position is also influenced by positive growth prospects for key industries which are important markets for the M&E sector’s intermediary products and are crucial in the sector’s value chain,” Ade said.
However, he cautioned that the recent downgrade of South Africa’s sovereign credit ratings to junk status by Fitch and Standard and Poor’s would have the propensity of increasing borrowing costs and the general cost of doing business, thus negatively affecting production and fixed investment into the sector and adding to its structural challenges.