Slump raises fears of SA recession

Lesotho Times
7 Min Read


The rand tumbled to record lows on Monday amid concerns that commodity prices will continue to fall as China's economy slows.JOHANNESBURG – South Africa’s economy shrank in the second quarter, raising the risk of a recession in Africa’s most industrialised nation.

Gross domestic product fell 1.3 percent quarter on quarter, far below analysts’ expectations, due to a sharper than predicted slowdown in the mining and manufacturing industries.

The beleaguered mining sector contracted 6.8 percent amid a fall in iron and coal production, while manufacturing output dropped 6.3 percent. The worst performing sector was agriculture, which contracted more than 17 per cent.

“It shows the harmful effects of load shedding [power outages], weak global demand and rising costs,” said David Faulkner, economist at HSBC.

“It certainly raises the possibility of recession . . . [although we] would have to see continued downward momentum in some of the major sectors for that to happen — in particular mining and manufacturing.”

The economy grew 1.3 percent in the first three months of 2015. An economy is deemed to be in recession if it endures two consecutive quarters of shrinking growth.

The bleak economic data came a day after the rand slid to a fresh all-time intra-day low of R14 against the US dollar, as global market turbulence caused by the slide in Chinese equities battered emerging market currencies.

Razia Khan, chief economist for Africa at Standard Chartered, said that while emerging markets currencies have suffered as a group, the weaker than expected GDP data “provides a South Africa-specific factor to drive the rand weaker”.

She added: “Given the deterioration in the external environment — at least as reflected in market sentiment rather than real economic conditions — this will compound South Africa’s problems.”

The rand rebounded 0.8 percent on Tuesday to R13, while South African bond yields dropped after hitting a new high for the year on Monday of 8.6 percent.

Governments across Africa have been grappling with weak currencies, while resource-rich nations such as Nigeria, Angola and Zambia have been further hit by the fall in oil and metals prices.

The fear now is that further slowdown in China — Africa’s biggest trading partner and a key investor on the continent, particularly in infrastructure projects — will exacerbate the challenges faced by governments.

South Africa, as the most advanced African economy and one of the most liquid and traded emerging markets, is also more exposed to global growth trends than many of its peers on the continent.


But domestic issues have added to South Africa’s list of problems, including power outages, electricity tariff increases, rising labour costs and weak consumer and investor confidence. A quarter of the workforce is unemployed and more than half of people under 25 years old. Widening inequality has driven an increase in crime and violent attacks on shop owners and laborers from poorer African countries.

Pretoria had hoped for growth of about two percent for the year, but the figures are likely to lead to further downgrades in growth forecasts.

The South African economy grew 1.5 percent in 2014, its worst performance since the 2009 recession.

“The government, they are not helping,” said Phila Mkhize, a 26-year-old Johannesburg native who wanted to train as a paramedic after graduating from high school but couldn’t afford the courses. Now he works as a security guard at one of the city’s many malls.

“It’s very hard these days to find a job,” he said.

The rand is only the most widely traded among African currencies to take a tough beating this year from investors who are dumping risky assets around the world. Currencies in countries including Ghana, Zambia and Uganda have slumped by as much as 20% this year.

Companies like Harmony Gold Mining Co. Ltd. are reassessing the lifespans of their mines as those headwinds run up against lower commodity prices. Electricity costs have more than tripled between 2008 and 2014, according to the Chamber of Mines of South Africa, thanks to a lack of maintenance and updates to aging infrastructure.

Without urgent reforms, “you start talking more straws on a camel’s back,” said Srinivasan Venkatakrishnan, Chief Executive of Johannesburg-based AngloGold Ashanti Ltd. , the world’s No. 3 gold producer. Already some miners, including Lonmin PLC, have said they may cut tens of thousands of jobs.

“Something has to give,” said Johannesburg-based Citi economist Gina Schoeman. “The current trajectory we’re on is simply unsustainable.”

And yet policy makers have demonstrated little will to act.

The poor growth figures make the conundrum facing South Africa’s central bank even more confounding. The bank wants to raise interest rates to prop up the rand. But tightening credit could freeze up growth even further.

President Jacob Zuma’s administration has demonstrated even deeper policy paralysis, economists say. In the years since the global financial crisis, the government did little to build up financial buffers. External debt has risen steadily, to about 40% of gross domestic product.

The World Bank last week urged the government to curtail public wages and reform labor laws, to reassure investors and free up cash to build new power plants. Failing such moves, the bank warned South Africa could slip into a quagmire of low growth and deep inequality.

“The important thing now is to take advantage of time left and, critically, to address the challenges that the global economic environment is creating,” said Catriona Purfield, the bank’s economist for South Africa. – FT/WSJ

Share this Article
Lesotho's widely read newspaper, published every Thursday and distributed throughout the country and in some parts of South Africa. Contact us today: News: Advertising: Telephone: +266 2231 5356
Leave a comment