SA’s economic woes worsen as GDP contracts 1.3%

South Africa’s economy contracted in the second quarter, worsening the outlook for a nation grappling with a plunging currency, power shortages and a slump in commodity prices.

Gross domestic product fell for the first time in more than a year, declining an annualized 1.3 percent from the previous quarter, when it expanded 1.3 percent, the statistics office said in a report released in the capital, Pretoria, on Tuesday. The median estimate of 18 economists surveyed by Bloomberg was for GDP to gain 0.6 percent.

Power constraints and a slump in prices of platinum, copper and other commodities are stifling output and limiting the economy’s recovery from the slowest expansion last year since a 2009 recession. That’s canceling out any benefit to exports coming from the rand’s slump to a record low of 14.0682 against the dollar on Monday.

Recession risk

“There are, unfortunately, very few factors telling us that economic growth and activity can pick up, especially in the context of the weak international economy, and particularly China,” Jana van Deventer, an economist at ETM Analytics in Johannesburg, said by phone. “One can’t rule out the possibility of a recession in South Africa.”

Manufacturing, which makes up about 13 percent of the economy, contracted an annualized 6.3 percent in the second quarter, while mining dropped 6.8 percent and agriculture declined 17.4 percent. Half of the 10 GDP sub-industries fell, while categories such as financial services, construction and transport expanded.

South Africa faces more than 60,000 job losses this year, mainly in mining as companies from Anglo American Plc to Lonmin Plc plan job cuts, according to labor union, Solidarity. A collapse in wage talks between gold producers and the two biggest labor unions in the industry adds to more volatility.

Jobs target

South Africa has little hope of meeting growth and jobs goals set in the government’s economic blueprint, known as the National Development Plan, Statistician General Pali Lehohla told reporters in Pretoria. The government’s target is to boost growth to 5 percent by 2019 and create 6 million jobs by then.

“There are strikes, the super-cycle of minerals has died,” Lehohla said. “Those who have set these targets have to sit up straight and say: what are we going to do to get to these targets.”

The central bank has little room to support the economy as a weaker rand fuels inflation. The Reserve Bank increased its benchmark repurchase rate by 25 basis points to 6 percent last month, the first policy move in a year, forecasting that inflation will exceed the 3 percent to 6 percent target band for the first half of next year.

Rate bets

The bank will “conduct policy in a manner that is sensitive to the fragile state of the economy,” Governor Lesetja Kganyago said on July 31. He estimates expansion of 2 percent this year.

Investors pared back bets of interest-rate increases with yields on the government rand bonds due December 2026 dropping 9 basis points to 8.44 percent. The rand gained 1 percent to 13.0954 against the dollar as of 12 p.m. in Johannesburg, recouping some of its losses yesterday and taking its decline this year to 12 percent.

The GDP figures “are very disappointing numbers,” Jeffrey Schultz, an economist at BNP Paribas Cadiz Securities in Johannesburg, said by phone. “The economy is under severe pressure from a number of areas, including electricity supply constraints, weak demand, a weak global environment and lower commodity prices.”

In a flash comment released after the data, Nedbank’s economic unit said the local economic outlook remains relatively weak and, “apart from the adverse effects of electricity supply shortages and fading competitiveness, the world economy has also become less supportive.”

“The global stock market rout, uncertainty around the pace of US monetary policy normalisation, risk-averse global investors, signs of a steeper deceleration in Chinese economic activity and the continual slide in global commodity prices are likely to hurt domestic confidence, undermine capital expenditure, aggravate unemployment, add to inflation, push interest rates higher and limit economic growth. GDP growth of less than 2 % is now likely for 2015 and an even slower pace is expected in 2016.

“Underlying economic activity remained weak early in the third quarter and the risk to the outlook remains on the downside. Despite this, the Monetary Policy Committee is still expected to focus more on the upside risk to inflation emanating from the rand’s sharp slide in recent weeks and the threat of even further weakness in the months ahead given the combination of increased global risk aversion and the expected rise in US interest rates.

“We still expect the weak economy to limit the pace of monetary tightening to another 25 basis points in September, followed by more aggressive hikes throughout 2016. However, the risk to the interest rate outlook resides on the upside,” Nedbank stated.

 

Source: Moneyweb