THE growing optimism about the South African economy was reflected in the Manufacturing Circle’s recently released 2017 fourth quarter investment tracker (MCIT).
The quarterly index tracks investment trends in the manufacturing sector. The focus is on actual expenditure patterns in the areas of property, plant and equipment, inventory, human capital and research and development.
In the last quarter of 2017, MCIT rose by three index points to 63, mirroring the first quarter of 2017 and jumping five index points on the same quarter in 2016. The increase was mainly driven by new investments in property, and higher spend on salaries and wages, which is expected in the fourth quarter, as firms hire more temporary staff to meet increased demand at this time of the year.
“Sentiment is changing and there is growing optimism about the prospects of the SA economy. Management teams are more positive about the future.,” said André de Ruyter, chairman of the Manufacturing Circle.
“MCIT reflects an upward trend, after a dip in quarter 3, with results consistently above the neutral 50-point mark, which is evidence of the resilience of the respondents, who are mostly medium to large firms.”
There was a 16 index point increase to 66 in investment on expanding existing property and/or purchasing of new buildings. Expenditure on property maintenance also rose from 58 to 66 points, the highest level since the introduction of the MCIT.
This is partly a result of the fact that general maintenance has been put off for an extended period due to the economic environment. It had reached a critical stage and needed to be attended to. In addition, there is always extra expenditure prior to the festive season.
Companies surveyed expect a further increase in the first quarter of 2018 which can be attributed to the general sentiment that the SA economy is improving.
Expenditure on new plant and equipment remained above the 50-point mark between Q3 2017 and Q4 2017 although at a lower rate, dropping from 72 points to 70.
Spending on the maintenance of existing plant and equipment increased in Q4 2017, continuing the increase from the previous quarter and adding a further 10 index points in Q4 to 66. Many companies use the December closure period for large maintenance projects so as to make effective use of downtime.
Looking ahead, manufacturers indicated that investment in new plant and equipment is likely to increase by the same rate in Q1 2018 as it did in Q4 2017, while expenditure on the maintenance of existing plant and equipment is likely to fall following extensive maintenance in the fourth quarter.
Spending on inventory follows demand patterns. In Q4 2017, it fell below the neutral 50-point threshold to 46 points after it had risen to 56 in the previous quarter. This is expected since sales generally increase in the fourth quarter every year, using up existing inventories.
Manufacturing firms expect spending on inventories to fall in Q1 2018 although not to the same extent as Q4 2017.
In Q4 2017 there was an increase in the expenditure on salaries by a further 14 index points compared to Q3, rising from 54 to 68. This was likely due to firms taking on more (temporary) workers to meet increased demand. There was also an increase in training similar to that in the previous quarter.
Looking at expectations, the surveyed manufacturers are likely to increase expenditure on both salaries and training; at a lower rate for salaries and wages as the use of temporary workers will be discontinued, but at a higher rate for training and development as firms upskill existing employees.
Investment in research and development increased in Q4 2017 by a further 10 index points from 56 to 66. This pattern is expected to continue.
In the period from Q4 2016 to Q4 2017, the actual Composite Index has generally been close to or equal to the forecasted values. This alignment is a reflection of the the skills and resources to budget accurately and respond and adapt effectively and efficiently to external circumstances where necessary.
De Ruyter stressed that the uptick in results needs to be sustained and that the manufacturing sector was not out of the woods. “With unemployment at a 14-year high of 27.7%, business confidence at its lowest level in a quarter of a century, and more than half of the population living in poverty, delivering jobs and inclusive growth has to be highest priority for government, business and labour.”
He added, “If manufacturing can expand to 30% of GDP, between 800 000 and 1.1 million direct jobs can be created, with five to eight times that number in indirect jobs. Our ‘Map to a Million’ puts forward detailed proposals to deliver a million jobs in manufacturing in the next decade.”