SA slides towards recessionComment on this story
Johannesburg - Standard & Poor’s and Fitch Ratings are preparing to rate South Africa’s credit profile this week after recent developments that saw the economy contract by 0.6 percent, sparking fears that the country may be heading towards recession.
Consumer spending has dipped, while electricity constraints, poor manufacturing output, a drop in business confidence and the protracted five-month strike action in the platinum belt are raising questions on whether the country is heading towards recession or not.
Another factor that may serve as a devastating blow to the economy is the uncertainty of a looming strike in the gold sector by the National Union of Metalworkers of SA (Numsa), which may derail negotiations to end the five-month platinum sector strike led by the Association of Mineworkers and Construction Union (Amcu).
The Labour Court on Friday reserved judgment on whether a potential strike in the gold industry should take place.
The Chamber of Mines launched an interdict asking the court to bar Amcu members from engaging in strike action at AngloGold Ashanti, Sibanye Gold and Harmony Gold.
“We will now await the judgment of the court. The interim order prohibiting Amcu and its members from embarking on protected strike action remains in place. We call on them to continue to respect the order,” Elize Strydom, the senior executive of employment relations at the chamber, said.
A consensus among economists interviewed by Business Report is that the consistent burden of uncompetitiveness in the mining and manufacturing sectors, as well as the prolonged disruption to production by strike action, will continue to strain growth figures and have an impact on the growth and spending potential in other sectors.
This week Gill Marcus, the governor of the Reserve Bank, told Bloomberg that the economy would probably avoid a recession, even as the strike at the three biggest platinum miners entered its fifth month.
She said there would have to be a dramatic decrease in the numbers that were already there for the country to sink into a recession.
Newly appointed Finance Minister Nhlanhla Nene also tried to put a brave face on events by talking down warnings that the country was sliding into recession.
The long-term foreign and local currency Issuer Default Ratings (IDR) are at BBB and BBB+, respectively, while the country ceiling is currently rated at A-, according to Fitch Ratings.
It is largely expected that due to the ongoing strike’s damage to the economy, the sovereign rating may be downgraded from A- to BBB+ on Friday.
Annabel Bishop, an Investec group economist, took a bleak view in a macro-economic bulletin released last week.
“The Reserve Bank continues to communicate its intention of hiking interest rates in the face of a recession, the rand weakens materially in response, slipping into the down case scenario, which includes the risk of a credit rating downgrade.”
Kamilla Kaplan, an economist at Investec, said this week’s data releases would focus on the performance of the production side of the economy.
“Specifically, the mining and manufacturing production figures for April will provide an indication of activity at the start of the second quarter.”
She added: “The performance of the mining sector will remain heavily influenced by the loss of platinum production resulting from the wage strike. Platinum group metals (PGMs) comprise around a quarter of total mining production, which should produce another contraction in annual growth in April.”
Craig Parker, a senior economic consultant at Frost & Sullivan Africa, said the largest contribution to the contraction in the first quarter came from the mining and quarrying industry.
“This was to be expected as a result of the prolonged strike. The industry contracted by 24.7 percent over the previous quarter and the manufacturing sector contracted by 4.4 percent. The major contributors to the contraction in the manufacturing sector were the chemicals, petroleum and the iron, steel and metals sectors,” he said.
“The strengthening global climate with US GDP increasing by 2.5 percent year-on-year and the uptick in the EU, bodes well for South Africa and should result in higher GDP growth for us in the medium-term,” Parker said.
Assessing other indicators, there has been expansion in the construction industry, with a 4.9 percent increase over the same quarter last year. Wholesale, retail and motor trade also grew 2.4 percent in the first quarter compared with last year, according to Trading Economics.
“This shows that the economy is not dead, but there is growth in consumption and construction,” Parker said.
The major negative influence on the growth figures for the first quarter is the mining industry and the spillover effects on other manufacturing industries.
The macroeconomic fundamentals in other sectors of the economy, as well as an uptick in global GDP growth, should allow positive growth figures in the second quarter.
He believed that, after considering all the factors, South Africa should not be entering a recession in the next quarter.
Goolam Ballim, the chief economist of Standard Bank, said the first half would reflect a contraction condition.
Even if there was some degree of sputtering growth, it might feel like the country was in a recession.
His main concern was that for two and a half years, the country struggled to grow at a better rate than 2.5 percent.
“Private sector job creation has been scant; by international contrast South Africa’s post 2009 recession recovery has been underwhelming. The more meaningful question is what South Africa has to do to boost cyclical growth and over long term to overcome structural constraints,” he said.
He argued that fierce urgency was required to reconstruct the economy for a more inviting business climate.
On Thursday, the SA Chamber of Commerce and Industry lowered the business confidence index to 88.9 points last month, falling 3.7 points below 90 for the first time since April 2000.
“It does not seem to be harvesting the political lever to show zealous will and assertiveness in revitalising the economy,” he said.
Also, the country seemed to have unearthed additional structural fault lines in the labour market and the indication of this was not only Amcu’s reluctance to find meaningful compromise, but businesses historical neglect of the broader socio-economic issues, he said.