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South African economy enters recession as Q1 GDP contracts 0.7%

South Africa’s gross domestic product (GDP) contracted by 0.7% in the first quarter of the year, pushing the country in a technical recession.

This followed on the 0.3% contraction in GDP in the fourth quarter of last year.

Citing the trade, catering and accommodation industry as the largest negative contributor to the first-quarter GDP, Statistics South Africa (Stats SA) pointed out that the sector decreased by 5.9% and contributed -0.8 of a percentage point to GDP growth, followed by the manufacturing industry contracting by 3.7% and contributing -0.5 of a percentage point to GDP growth.

Seven out of ten divisions under the manufacturing ticker reported negative growth rates in the first quarter, with the largest contributor to the decrease being the petroleum, chemical products, rubber and plastic products division.

In contrast, the mining and quarrying industry increased by 12.8%, and contributed 0.9 of a percentage point to GDP growth – largely the result of higher gold and “other” metal ore production.

The Steel and Engineering Industries Federation of Southern Africa (Seifsa) welcomed the 12.8% increase in mining production in the first quarter, as the mining industry constituted about 25% of the metals and engineering sector’s demand profile.

Nevertheless, it revised its initial forecast for growth in the metals and engineering sector from 1.4% to 1.2% for 2017, as a result of a weaker-than-expected first quarter.

Seifsa senior economist Tafadzwa Chibanguza noted it was regrettable that, while commodity prices appeared favourable for the mining sector, the sector continued “to be in limbo in anticipation of an important policy direction” from government.

He added that this uncertainty was likely to continue to hold back much-needed investment into mining operations and, inevitably, this would impact negatively on the metals and engineering sector.

The agriculture, forestry and fishing industry rebounded in the first quarter of 2017 on the back of eight consecutive quarters of contraction. The industry’s increase of 22.2% in the first quarter of 2017 was mainly as a result of increases in the production of field crops and horticultural products.

Meanwhile, the electricity, gas and water industry contracted by 4.8%, owing to decreases in electricity produced in the first quarter, with the amount of water distributed decreasing, mainly driven by continued water restrictions in some parts of the country still recovering from the drought conditions.

The construction industry decreased by 1.3%. Decreases were reported for non-residential buildings and construction works.

Economist Mike Schussler told Engineering News Online that the latest statistics do not bode well for business, noting that it will “certainly drag business confidence even lower”.

During a telephone interview, he noted that the ratings agencies were now even more likely to downgrade the sovereign’s fiscal outlook. “We are in a very difficult arena . . . the country’s per capita income is not going to grow, our population is growing [at the same rate it has been] and if we do not see the GDP growing more than that, we are stuck,” he pointed out.

“The rest of the world is in a growth phase and we are stuck with Guptastan,” he added.

Citadel chief economist Maarten Ackerman said “the reality is that South Africa’s growth has been slipping sharply since 2011 compared to global peers. One needs to remember that the weak numbers released today are a reflection of the activity before the recent government reshuffle and subsequent ratings downgrade.

“The latest numbers confirm that we will need to do everything in our power to keep fiscal discipline to avoid any further downgrades in the near future,” he stressed.

The National Treasury noted that if the current growth rate was sustained, it would lead to a further decline in GDP per capita and revenue, “risking the sustainability of our fiscal framework and, more importantly, undermining the delivery of social services”.

“The current state of the economy puts more pressure on us as government, business, labour and broader society to intensify our growth programme and improve confidence as a matter of urgency to arrest the decline and set the economy on a higher growth trajectory,” it added.

Chibanguza said Seifsa was also gravely concerned about the economy’s descent into a recession, noting that it was particularly concerning that the tertiary sector – which historically does not contribute to contraction – had shrunk by 5.9% during the quarter.

“This is a significant deviation from the traditional norm and is indicative of the widespread nature of challenges. Economic reform is needed urgently to resolve the challenge of lacklustre growth,” he noted.

Meanwhile, Schussler said the slow GDP growth has already impacted on investment inflows and outflows in the country, with the local stock market “going nowhere” and local retailers and bankers, who derive significant turnover from South Africa, being hardest hit.

“The Reserve Bank will now have to think much harder about rates, as they want to provide relief to the consumer. This is a consumer recession,” said Schussler.

With take-home pay also severely impacted, the consumer would remain careful in spending, with confidence also at an all-time low.

“The consumer has started to see the corruption; they feel they are not getting anything of value anymore. Consumers are busy recovering and not prepared to spend anything on credit; people feel insecure in their jobs.”

Schussler highlighted that the GDP should have improved on the back of the uptick in the mining and agriculture industries, but was dragged down by the lower consumer confidence.

“Shops are emptier. The lipstick index – fast food – is slowing down, we’ve seen car sales in the doldrums for a long time. I last saw two estate agents in a museum; it’s a bum fight in that industry,” he quipped.

Seifsa CEO Kaizer Nyatsumba agreed, highlighting that the economy was likely to continue to under-perform for as long as the country lacked inspirational political leadership that enjoyed the confidence of all South Africans and ensured that government, business and labour worked together effectively as partners.

However, looking ahead, Schussler believed that “we are through the worst of it”, with society voicing its concerns through election results, which would translate in a “different country” in future.

He further pointed out that GDP growth figures for the second quarter should be better, as inflation has dropped radically and the upcoming two-month drop in the petrol price should boost consumer confidence.

Ackerman, however, noted that the numbers also suggested that the consensus growth assumption for the year – which was around 1% – was probably not achievable. “The weak growth numbers coupled with declining inflation suggest that the South African Reserve Bank should be in no rush to hike interest rates anymore. In fact, we might see a cut in rates before the end of this year.

“The current environment also suggests that the recent strength in the currency is not sustainable and a sharp depreciation in the medium term is becoming more likely to reflect the true, underlying economic fundamentals,” he pointed out.

North West University Business School Professor Raymond Parsons also voiced his concerns about the slow GDP growth, noting that it would negative implications for employment, tax revenues, business confidence and future investment ratings. “Whether we like it or not, the local economy is entering rough seas, and the storm signals are up.”

Stats SA also reported that expenditure GDP fell by 0.8% during the first quarter, with household final consumption expenditure (HFCE) down 2.3%, contributing -1.4 percentage points to total growth.

The main negative contributors to growth in HFCE were food and non-alcoholic beverages, clothing and footwear and transport.

Gross fixed capital formation (GFCF) grew by 1%, a second consecutive quarterly increase. The largest contributor to growth in the first quarter was machinery and other equipment, which increased by 7.9% and contributed 2.5 percentage points to growth in GFCF.

There was a R2.7-billion build-up of inventories during the quarter, which contributed 2.5 percentage points to total growth.

Net exports contributed negatively to growth in expenditure GDP. Both goods and services contributed negatively to the growth in exports. Exports of mineral products and vehicles and transport equipment were largely responsible for the decrease in goods.

Imports of goods and services increased by 3.2%, driven largely by imports of mineral products.

Source : Engineering News

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

South African economy avoids recession

South Africa has avoided being tipped into recession after second-quarter GDP figures showed the economy grew by 0.6% during the April-to-June period.

The economy had contracted by 0.6% in the first quarter. A platinum strike in the country was blamed for the poor performance in the first three months.

South Africa was last in recession in 2008 amid the global financial crisis.

By 2011 it had made a substantial recovery, but there have been worries recently that it would slip back.

Africa’s most advanced economy, and the continent’s second largest, grew by 1% on an unadjusted year-on-year basis in the quarter, against growth of 1.6% in the previous quarter.

South Africa’s agriculture and financial sectors grew 4.9% and 1.5% respectively in the second quarter.

Meanwhile, the under-pressure mining sector contracted 9.4% quarter-on-quarter in the second three months of the year, and manufacturing contracted by 2.1%.

The wholesale and retail trade sales shrank by 0.2%, while construction expanded by 5%.


Source – BBC News

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