South Africa's manufacturing output was weaker than expected in April as export demand remained sluggish, adding to signs that economic recovery is hesitant and supporting the case for an interest rate cut later this year.
Other data released on Thursday indicated Africa's biggest economy is headed for prolonged strain as production and demand for its minerals remains tepid, its trade partners are buying fewer of its manufactured goods and local businesses see the outlook as being the bleakest in about a decade.
"If anyone had any doubt that the risk of a new slowdown in the South African economy is now non-negligible, this manufacturing data will reinforce that," said Razia Khan, head of Africa research at Standard Chartered bank.
"The euro area is of course the key export destination for South African manufactured goods, so it is difficult to be very surprised by developments. Clearly external weakness and its impact on the South African economy will continue to be a concern to policymakers."
A raft of weak domestic data and signs of a sharp downturn in major markets including the euro zone have seen economists push back their expectations for the resumption of monetary tightening in South Africa by about a year to late 2013, a Reuters survey showed.
At the start of the year, analysts expected rates to start rising as early as the fourth quarter of 2012. Now some say the central bank may actually cut rates, perhaps as early as September.
Statistics South Africa data showed factory output, which accounts for about 15% of GDP, grew by 1.2% year-on-year in volume terms in April – below forecasts of 1.9% – after contracting by 2.9% in March.
Government bonds edged up after the factory data, with the yield on the 2015 bond dipping to 6.235% from 6.245% before, while that for the 14-year bond fell to 8.25% from 8.265%, suggesting the market is pricing in lower rates.
The Reserve Bank, which has kept rates at three-decade lows since late 2010, left its main rate unchanged at 5.5% at its last policy meeting in May but sounded a dovish tone about the effects of a bleak global outlook, revising its domestic growth forecast down slightly.
The Bank now sees economic expansion of 2.9% in 2012 compared to previous expectations of 3.0%. This still compares favourably with the National Treasury's prediction of 2.7% growth this year.
MINING DRAGS DOWN GROWTH
Growth started sluggishly this year, dragged down mainly by a 16.8% contraction in the mining sector.
Weakness in the sector continued into the second quarter, with total mineral production falling 10.6% in volume terms in April compared with the same month last year.
Gold output alone fell by 12.8% while platinum production, for which South Africa is the biggest producer in the world, contracted 28% year-on-year.
"The outlook for the mining sector remains bleak in the short term," said Nedbank in an economic note.
"With recent indicators suggesting loss of momentum in global growth, euro zone problems persisting, certain commodity prices easing and the operating environment remaining difficult, the performance of the mining sector will remain weak."
In a sign of growing worries, a local business confidence index plunged to a 10-year low in May, extending this year's downward spiral, data showed on Thursday.