Factory output disappoints

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Leaves the door open for a possible rate cut.

JOHANNESBURG (Reuters) - Factory output in South Africa grew more slowly than expected in January, data showed on Thursday, leaving the door open for a possible interest rate cut this month as the country struggles to emerge from recession.

Manufacturing is one of the economy's key drivers and its collapse last year in the face of depressed local and global demand helped push South Africa into its first recession in nearly two decades, which it only exited in the third quarter.

Factory production rose for the first time in more than a year on an annual basis in December and Statistics South Africa data showed a 3.7 percent expansion for January, but this fell well short of the 6.1 percent increase predicted by economists in a Reuters poll.

"That's a disappointing number, I even had a higher forecast than the market consensus," Elize Kruger, economist at KADD Capital said.

"I would have to say that the recovery won't be a straight line upwards, we will sometimes tread water ... We are disappointed but we do not believe that we're going backwards."

Compared with December, production fell by a seasonally-adjusted 0.6 percent, Stats S.A. said.

The ruling ANC party's leftist allies are likely to use the relatively weak factory data to back their calls for aggressive interest rate cuts this year, to help spur economic growth and create employment after some 900,000 jobs were lost last year.

The National Treasury says the economy is expected to grow by 2.3 percent in 2010 after contracting 1.8 percent last year, but unemployment of about 25 percent remains a critical challenge.

The central bank left rates unchanged for the fourth consecutive time in January, partly on inflation concerns, after 500 basis points of decreases between December 2008 and August last year.

This has angered labour unions and communists who say interest rates are still too high, and have hit poor South Africans hardest.

The January manufacturing number showed that while economic recovery was undoubtedly still under way, it "may not be as strong as everyone might have wished", said Andre Roux, head of fixed income at Investec Asset Management.

"It leaves the Reserve Bank with a dilemma. A further cut in rates cannot be ruled out when the MPC (monetary policy committee) meets later in the month."