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South Africa set to avoid recession as mining, manufacturing jump

South Africa is set to avoid slipping into a technical recession this year following surprise improvements in mining and manufacturing output, although the economy remains under pressure due to recent credit downgrades to junk.

The economy contracted 0.3% in the final quarter of 2016 and a second consecutive contraction would have pushed the economy into recession for the first time since the global financial crisis of 2009.

Mining output beat expectations of a 4.3% increase, with demand from China and higher commodity prices globally propelling the sector’s output to a two-year high.

While growth in manufacturing was modest, at 0.3% year-on-year in March, after shrinking by 3.7% in February, it was comfortably wide of market expectations of a 2% contraction.

“The improved mining, growth in agriculture and the improved vehicle sales should keep first quarter GDP growth in positive territory,” senior economist at Nedbank Nicky Weimar said.

Treasury has said it expects the economy to expand by 1.3% this year. On Tuesday the International Monetary Fund said it saw South Africa’s growth at 0.8% in 2017.

The decision in April by S&P Global Ratings and Fitch to downgrade South Africa to sub investment after President Jacob Zuma removed Pravin Gordhan as finance minister had increased the risk of recession.

The rand plunged about 12% in the wake of the cabinet changes, prompting the central bank to put off possible interest rate cuts due to a weaker currency stoking inflation. The downgrade has also limited already dire levels of investment.

But the steep jump in mining output in March, by 15.5% according to Statistics South Africa data on Thursday, combined with a surprise rebound in manufacturing could see growth remain in the black, economists said.

“That will be a sizeable contribution to quarter one growth especially if we expect the agricultural sector to start to contribute positively,” said Elize Kruger of NKC African Economics, who forecasts first quarter growth at 1%.

Nedbank’s Weimar said the downgrades to junk were the big negative.

Source: Engineering News