Falling PPI points to weak demand in South Africa’s economy – Seifsa

South Africa’s hard-pressed manufacturers are on the receiving end of the weak economy as there is little room to pass on cost increases, Steel and Engineering Industries Federation of Southern Africa (Seifsa) economist Marique Kruger said in a statement on Thursday.
 
The June Producer Price Index (PPI) for intermediate goods recorded a 2.1% year-on-year increase, which is down from the 3.1% year-on-year increase recorded in May.
 
“The economy is very weak and there is just not enough room for manufacturers to pass on cost increases into the market,” Kruger said.
 
She pointed out that the metals and engineering sector made up two-thirds of the make-up of the PPI for intermediate manufactured goods. 
 
Between June 2016 and June this year, Seifsa’s composite input cost index, which tracks a basket of input costs for the metals and engineering sector, recorded a decrease of 4.1%.

“This index has exhibited a decreasing trend since the latter part of 2016, largely attributable to a relatively stronger rand during this period,” Kruger said.

She pointed out that imported inputs contribute just over a third of the sector’s input cost basket and, as a result, a stronger rand has really helped to contain input costs for manufacturers in the sector.
 
Even though selling price inflation had been on the decrease in the last four months, there was a positive differential between selling price inflation and input cost inflation, which was indicative of reduced pressure on margins, allowing companies to recoup some historic losses and repair balance sheets to an extent.
 
However, Kruger said Seifsa anticipates a narrowing in this positive differential, given the fact that the economy remains weak, therefore limiting the upside prospects for selling price inflation.

“In addition, the metals and engineering sector is in the process of hopefully concluding a new wage deal soon, which will result in an increase in inputs costs. We will continue to monitor this trend,” she noted.