Wiseman Khuzwayo

SOUTH Africa has pulled back from the precipice, economic consultancy Econometrix says in its economic outlook for the third quarter, but it warns that a significant amount of damage has already been done.

The economy contracted by 0.6 percent in the first quarter, an annualised quarter-on-quarter figure that was the first decline since the second quarter of 2009.

This has led to a downward revision of full-year gross domestic product growth forecasts.

The Reserve Bank has cut its forecast from 2.1 percent to 1.7 percent, the International Monetary Fund from 2.3 percent to 1.7 percent, ratings agency Fitch from 2.8 percent to 1.7 percent, and Investec from 2.2 percent to 1.9 percent.

Raymond Parsons, a professor at the North West University Business School, says at one stage a few weeks ago, the question whether a “technical recession” would develop was a very close call, after a significant shrinkage in GDP in the first quarter had raised the spectre of two consecutive quarters of contraction.

He says many analysts then hoped a better second-quarter economic performance would offset the economic damage resulting from the prolonged platinum sector strike.

“The bad news is that, unfortunately, some preliminary statistics for the second quarter show the scales again tipping towards confirmation of a technical recession in the first half, although until we eventually get more definite figures, it still appears a ‘touch-and-go’ experience,” Parsons says.

The data to watch out for this week are the retail sales and mining figures for June.

Econometrix says: “Evidence gleaned from the May retail sales data suggested that in spite of the fact that the platinum strike continued in earnest through May, the retail sector once again showed no signs of collapsing.”

The economics consultancy says one would have thought that the resultant loss of pay for striking workers in the month would have dampened retail sales. It says the production of platinum group metals is likely to have been negatively affected as a result of the strike continuing through to the end of June.

Annualised growth in manufacturing production came in stronger in June, at 0.5 percent, compared with a contraction of 3.8 percent in May.

Despite weak economic growth, consumer inflation is rising and is currently at 6.6 percent, above the Reserve Bank’s target range of between 3 percent and 6 percent.

The central bank has also raised interest rates by 75 basis points this year in response to the rising inflation.

Annabel Bishop, the chief economist at Investec, says she believes that after rising in the first half, the consumer price index (CPI) inflation will fall for the rest of the year on declining food price inflation, reducing the need for any further interest rate hikes this year.

She says: “The lower CPI inflation ends in 2014, the lower it will start 2015, and so declining CPI inflation in the second half will lower the Reserve Bank’s inflation expectations for 2015, reducing pressure for higher interest rates from this source.”

Bishop says it should be noted, however, that besides actual and expected inflation, the Reserve Bank’s monetary policy decisions are also influenced by global monetary policy, particularly the normalisation in the US.

“Even if inflation is likely to fall back well within the target in 2015, should the US hike rates by earlier than the current expectation of mid-2015, then the Reserve Bank could speed up its upward interest rate trajectory.”