S.Africa factory output up, rate cut hopes diminish

By Stella Mapenzauswa

JOHANNESBURG (Reuters) - South Africa's factory output swung strongly into positive territory in the year to December, snapping 14 months of annual contraction in the latest indication manufacturers are recovering after last year's economic downturn.

Although consumer demand remains depressed, the strong manufacturing number could dampen expectations of interest rate cuts aimed at helping boost growth after Africa's economic powerhouse emerged from its first recession in nearly 2 decades late last year.

But this is unlikely to silence President Jacob Zuma's labour union and communist allies, who say lending rates remain too high, hitting hardest millions of South Africans still mired in poverty nearly 16 years after the advent of democracy.

Statistics South Africa said on Thursday manufacturing output surged to 3.2 percent year-on-year in volume terms in December compared with a revised 4.6 percent contraction in November, outpacing economists' forecasts of a 0.9 percent increase.

Compared with November, factory production in volume terms rose by a seasonally-adjusted 3.0 percent in December. Output was up 3.3 percent in the three months to December compared with the previous three months, also on a seasonally-adjusted basis.

The data comes after the latest purchasing managers' index rose to a seasonally-adjusted 53.6 points in January, its sixth straight gain after wallowing below the key 50.0 level for 18 months.

ECONOMY ON RECOVERY PATH

"This is one more arrow in the right direction indicating that the economy is in the recovery phase. In that sense, one could say the positive number could argue against further monetary policy loosening," said KADD Capital economist Elize Kruger.