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Strike pushing SA towards recession

Pretoria – South Africa’s economy shrank in the first quarter of this year, the first quarterly contraction since a recession five years ago, as mining output plummeted due to a protracted strike in the platinum sector.

The economic decline presents a challenge for new Finance Minister Nhlanhla Nene to steer an economy that has struggled to grow by more than 2% annually or generate many new jobs since the 2009 recession.

The weak data also undermines the case for more interest rate hikes this year after the central bank lifted its benchmark rate by 50 basis points in January, although it remains concerned about rising inflation pressures.

Gross domestic product shrank 0.6% quarter-on-quarter in the first three months of the year after a 3.8% increase in the final quarter of 2013, Statistics South Africa said on Tuesday.

GDP was dragged into negative territory by a 24.7% plunge in mining production and a 4.4% fall in factory output.

On an unadjusted year-on-year basis, GDP was up 1.6% in the first quarter compared with 2% previously.

Mining and manufacturing account for about a fifth of the economy, but have been plagued by strikes in the last few years, reflecting rigid labour laws that critics say are a deterrent to investment.

The current mining strike, over wages and now in its fifth month, is the costliest and longest in South Africa’s history.

The first quarter decline in mining output was the steepest since 1967 due to stoppages at the country’s platinum mines, which normally account for 40% of global production of the precious metal.

Economists polled by Reuters had expected GDP in South Africa - recently overtaken by Nigeria as Africa’s biggest economy - to contract by just 0.1% quarter-on-quarter while expanding 1.9% compared with the same period last year.

“With industrial unrest still continuing, there is little hope for a robust recovery in mining output in Q2 2014,” Standard Chartered analyst Razia Khan said.

“The challenges for the South African economy persist.”

On Tuesday the rand hit a session low of R10.4690/$, its weakest since May 21 according to Thomson Reuters data, and was at R10.46/$ by 15:37, representing a 1.02% fall from Monday’s close in New York.

Sustained rand weakness could force the Reserve Bank’s hand and spur another interest rate rise to rein in inflation, with CPI seen climbing higher after breaching the top end of a 3-6% target band in April.

The South African Reserve Bank (Sarb) kept interest rates steady at 5.5% last week to give the economy breathing space, but indicated that it was still firmly in a tightening cycle.

“The Sarb will have no easy decisions when deciding on the speed and timing of policy rate normalisation given an increasingly uncomfortable inflation environment,” Jeffrey Schultz, economist at BNP Paribas Cadiz Securities, said.

“We continue to factor in between 50-75 bps in rate hikes in the second half, but acknowledge that this could be even shallower should real economy indicators continue to disappoint.”

Source – News24