South Africa’s economy grew at a disappointing pace in the first quarter of 2015 hit by the contraction in both agriculture and manufacturing.
Adding to the bad news is the fact that the local unemployment rate has aedged up.
Gross domestic product (GDP) rose an annualised 1.3 percent from the previous quarter, when it expanded 4.1 percent, Statistics SA said yesterday.
The growth in the local agricultural and manufacturing sectors fell 16.6 percent quarter-on-quarter and 2.4 quarter-on-quarter, respectively, which sliced a respective 0.4 percent and 0.3 percent from GDP growth, Citi said in a note.
The unemployment rate climbed to 26.4 percent, the highest level in 11 years.
This all means that the SA Reserve Bank faces a tough juggling act at its next monetary policy meeting in July.
Rising costs are fuelling inflation on the upside and structural weaknesses in job creation and a wobbly currency all leave the door open for the central bank either to hike rates or leave then unchanged.
The rand fell as low as R12.0857 against the US dollar yesterday, the local unit’s weakest level since May 12, from R11.9592 before the data was released.
Investec economist Annabel Bishop said while the level of growth was lower than the 1.5 percent quarter-on-quarter seasonally adjusted and annualised, the economy might still stay the course.
“The slightly weaker outcome for 2015 quarter one is not significant enough to change our view for the year as a whole, which is still growth of 2.1 percent year-on-year,” she said.
Labour update
In its labour update, Investec said prospects for meaningful job creation were weak especially as National Treasury had announced a freeze on civil service personnel headcounts over the next two years.
It said in the private sector, weak economic growth and depressed business confidence did not bode well for job creation.
Citi said while the weak GDP would not necessarily change the hawkish stance of the SA Reserve Bank, the almost 2 percentage point rise in the first quarter unemployment rate to 26.4 percent also beared consideration.
“The stagflation theme has thus intensified which will only fuel the monetary policy debate,” Citi said.
Stagflation is persistent high inflation combined with high unemployment and stagnant demand in a country’s economy.
Meganomics economist, Colen Garrow, said the unemployment statistics at 26 percent and GDP figure as it was had made a case for interest rates to stay as they were.
“The problem is that it worsens the outlook for the forecast by the Treasury and the outlook for key ratios that credit rating agencies monitor is dismal. We are not too far away from a non-investment grade rating as put by Standard & Poor’s,” Garrow said.
Poor growth
Garrow foresaw another quarter of poor growth especially with electricity outages continuing.
He said the Treasury forecast of 2.1 percent growth this year was rather optimistic and pegged potential growth for the year at or lower than 1.5 percent.
Jana van Deventer, an ETM Analytics economist, said the status of the economy forced government hands to “rein in spending to promote fiscal consolidation and lower the deficit to avoid another downgrade”.
She pegged her forecast for growth between 1.5 percent to 2 percent saying there were structural constraints to the economy such as policies that were not conducive to business development.
Manufacturing during the quarter took a significant hit from power utility Eskom implementing 21 days of power cuts in the first three months of the year.
Economists yesterday conceded that while the shrinkage in civil service input might have contributed, erratic power supply and drought brought the spectre on further downgrades by ratings agencies much closer.
“The contraction in manufacturing, at least six times over the last nine quarters, is quite alarming. The surprise has been the shrinking in the government services sector,” Van Deventer said.
Civil service
According to Stats SA, the government services sector shrank by 0.8 percent in the first quarter of 2015, largely as a result of the resignations.
If government services had not contracted by 0.8 percent but had instead expanded by 2 percent (quarter-on-quarter and annualised), the growth rate for the entire economy would have been 1.8 percent in the first quarter of 2015.
Stats SA ascribed a 0.8 percent growth potential the economy had to a shrinking civil service after mostly teachers and police officers resigned from government under the impression that changes to pension legislation would shrink their benefits.