Analysis: Marcus has few options as GDP declinesComment on this story
The worst quarter for South Africa’s economy since the 2009 recession leaves Reserve Bank governor Gill Marcus with few options to battle inflation that breached the ceiling of the bank’s target last month and is forecast to get worse.
The contraction in gross domestic product (GDP) in the three months through March, the first since the second quarter of 2009, was deeper than analysts had predicted and occurred as strikes paralysed the platinum mining industry and weighed on manufacturing.
Marcus, who kept interest rates unchanged last week, laid out a scenario of weak economic prospects even as she said inflation would not peak until the fourth quarter.
“South Africa is facing the worst of both worlds, a shrinking economy amid high inflation,” Nicholas Spiro, the managing director of Spiro Sovereign Strategy, said. “The reason behind the Reserve Bank’s reluctance to hike rates is plain for all to see, with the outright contraction in first-quarter GDP diminishing the scope for rate hikes this year.”
Forward-rate agreements, used to speculate on borrowing costs, starting after the next monetary policy committee (MPC) meeting in July, have dropped 8 basis points since the May 22 rates decision and are pricing in 21 basis points of rate increases, down from 58 basis points in January. Similar maturity contracts for Poland are pricing in 6 basis points of cuts.
GDP slumped an annualised 0.6 percent in the first quarter from the previous three months, after expanding 3.8 percent in the fourth quarter of last year, Statistics SA said on Tuesday. The median estimate of 22 economists was for a contraction of 0.2 percent.
Mining shrank 24.7 percent, the biggest quarterly drop in almost half a century, amid an 18-week strike by more than 70 000 miners at Anglo American Platinum, Impala Platinum and Lonmin.
Manufacturing, which makes up 15 percent of the economy, fell 4.4 percent as industries from chemicals to iron ore were hurt by the strike.
“The first-quarter growth figures were shocking,” Adena-an Hardien, the chief economist at Cadiz Asset Management, said. “This, to some extent, validates the Reserve Bank’s cautionary approach toward hiking rates. The MPC will likely delay hiking as long as possible.”
One-year interest rate swaps have decreased 23 basis points to 6.24 percent since January 29, when the central bank unexpectedly raised its repo rate by 50 basis points to 5.5 percent. The MPC left borrowing costs unchanged at its two subsequent meetings.
Last week the central bank cut its growth forecast for this year to 2.1 percent from 2.6 percent, while trimming its average inflation forecast to 6.2 percent from the 6.3 percent estimated in March. Consumer prices rose 6.1 percent last month and the bank predicts inflation will remain above the ceiling of its 3 percent to 6 percent target band until the second quarter of next year.
“We continue to factor in between 50 and 75 basis points in rate hikes in the second half, but acknowledge that this could be even shallower should real economy indicators continue to disappoint,” Jeffrey Schultz, an economist at BNP Paribas Cadiz Securities, said yesterday.
The rand remained the biggest risk to inflation, Marcus said last week. The currency has gained 0.2 percent against the dollar this year after sliding 19 percent last year. It fell 4.7c to be bid at R10.496 to the dollar at 5pm yesterday. Yields on benchmark government bonds due in December 2026 rose 5 basis points to 8.24 percent.
The economic slowdown extended into the second quarter and there would no platinum produced at the affected mines in the current period, even if the strike were to end now, said Mike Schussler, the chief economist at Economists. co.za.
“The chances are, we are in a recession. This is self-inflicted. We can’t blame it on anybody else.” – Bloomberg