Analysis: SA recession risk rises amid global economic growth

Reserve Bank governor Gill Marcus. Photo: Simphiwe Mbokazi

Reserve Bank governor Gill Marcus. Photo: Simphiwe Mbokazi

Published Jun 10, 2014

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Johannesburg - Concern is deepening that South Africa’s economy is headed for its second recession in five years as the nation’s longest mining strike upends manufacturing.

An official report due today will show that factory output, representing about 15 percent of gross domestic product (GDP), fell 3.9 percent in April from a year ago, after expanding 0.7 percent in the previous month, according to the median estimate of 15 economists surveyed.

Mining probably shrank for a third consecutive month, declining 7.5 percent, a separate survey showed.

The 20-week strike that has shut the biggest platinum mines is hammering the economy at a time when global growth is set to reach its strongest level in three years, leaving South Africa vulnerable to credit-rating downgrades.

The economy contracted an annualised 0.6 percent in the three months through March and a further slump may prompt Reserve Bank governor Gill Marcus to hold off raising interest rates even as inflation exceeds her 3 percent to 6 percent target range.

“All the factors in the economy indicate the risk is… toward lower growth and possibly a second consecutive quarter of contraction,” Jana le Roux at ETM Analytics said on Friday. “The tone of the Reserve Bank’s communication makes it clear that the bank is worried about the outlook for economic growth.”

Rand slump

Forward rate agreements starting in nine months, used to lock in borrowing costs, have dropped 17 basis points since the beginning of last month to 6.73 percent, compared with a 34 basis point decline in emerging market peer Turkey, which cut borrowing costs by 50 basis points last month.

The rand has weakened 2.6 percent against the dollar since strengthening to its high this year on May 14, the biggest loss among 16 major currencies.

The Reserve Bank has kept its benchmark interest rate unchanged since raising it by half a percentage point to 5.5 percent in January.

Marcus said on May 22 that inflation would probably exceed the 6 percent upper limit of the target until the second quarter of next year, while the economy would expand 2.1 percent, less than a previous estimate of 2.6 percent.

The International Monetary Fund forecasts the world economy will grow 3.6 percent this year, up from 3 percent last year.

The strike by about 70 000 workers at mines owned by Anglo American Platinum, Lonmin and Impala Platinum caused mining output to plunge almost 25 percent in the first quarter. That affected production in manufacturing industries.

“Even though things are getting better for the US and Europe, South Africa continues to muddle through,” Christie Viljoen, an economist at NKC Independent Economists, said on Friday.

“Five years ago it was a different case, it was an external thing and it was out of our hands. But what is currently happening… is something we created ourselves.”

If manufacturing production comes in as forecast or worse in April, it will be the first contraction on an annual basis in seven months. Factory output probably declined 2.2 percent in the month, a survey of five economists showed.

“The April data will look very bad, it will feel like the economy is in recession and we probably are balanced on a knife’s edge,” Elize Kruger, an economist at KADD Capital, said on Friday.

Filters

“The mining industry is the source of the problems, but it filters through to manufacturing, exports and retail and it also affects confidence of businesses, consumers and foreign investors.”

Marcus said last week that the economy would probably avoid a recession since there would need to be “a very dramatic decrease” on the first-quarter contraction.

South Africa was in an interest rate tightening cycle with the rand being the biggest risk to inflation, the Reserve Bank said in a report released that same day. Consumer prices rose at an annual rate of 6.1 percent in April.

“If you look at high-frequency data, it continues to be negative every month, so it’s just putting the Reserve Bank in a very tight corner,” said Thabi Leoka, the head of South African research at Renaissance BJM Securities.

“The reality is that tightening rates will keep us in a recession.” – Bloomberg

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