South African economy takes a beating

The South African economy has taken a beating over the past few months raising fears that if the draining factors like labour volatility persists it will sink further and get trapped in low growth. Now all eyes will be on the South African Reserve Bank with added pressure for an interest rate cut.

Figures released by Stats SA yesterday showed the economy growing by a meager 0.9% in the first quarter of 2013 down from 2.1% of the fourth quarter of 2012. This growth figure throws South Africa way out of its target of growing the economy at a rate that will be sufficient to push back the country’s social pathologies unemployment and inequality.

The South African government has set a target of growing the economy by at least 6% per annum which is thought to be enough to push the economy into creating about 500000 jobs per year. Jobs figures released last week show that the economy continues to bleed jobs and the unemployment rate remains stubbornly high around 25%.

Business Unity South Africa (BUSA) expressed grave concerns over the latest GDP numbers.  “BUSA remains concerned at yet another decline in economic growth in 2013. Not unexpectedly, the manufacturing and agricultural sectors showed the biggest drop, and economic trends since then are unlikely to reverse the deteriorating outlook”.

A commentary from Vunani Securities said the first quarter growth figure was the slowest growth since South Africa emerged from the recession in the third quarter of 2009. On an annual basis, GDP slowed to 1.9% y/y from 2.3% y/y in the fourth quarter of 2012.

Vunani Securities added that a few technical factors plagued GDP measurement which should see GDP rebound off the first quarter low base. “Surprisingly, the tertiary sector’s growth held up well (unchanged at 2.4% q/q saar), in the face of slowing household consumption growth”.

Busa added that there may be some economic recovery in the second half of the year but it has revised its overall 2013 growth forecast from 2.5% to about 2.2%.  “Although still a positive growth rate under difficult circumstances, it is increasingly inadequate to support SA’s employment and development goals, implying the possibility of yet further job losses”.

Added BUSA “As this weakening economic performance is being driven primarily by domestic circumstances,  BUSA believes that SA should focus on the factors over which it has control and which could avoid the  economy drifting into a ‘low-growth trap’ in the period ahead. Uncertain, increasingly difficult labour relations contribute to declining domestic and overseas investor confidence.   SA’s increasing vulnerability to shifts in sentiment is reflected in the weak rand, also now under pressure from the large balance of payments deficit.  All this could eventually influence SA’s global credit ratings and raise the cost of much needed finance”.

“To ameliorate the situation will require SA to expedite the roll-out of the current infrastructural programme which will help to underpin growth and employment. The SARB left interest rates unchanged last week, but is ready to act in any direction if the outlook changes materially,” said BUSA.

Vunani said “Given our expectation of a rebound in growth in Q2 13, we see interest rates remaining unchanged over the policy horizon, with the first movement being a rate hike late 2014. Should high frequency data for the months of April and May released over the coming two months not show significant improvement, we are however of the opinion that the probability of an interest rate cut could arise”.

Peter Attard Montalto, a strategist at Nomura said, “Overall, we can see that despite the strikes being past the peak, knock-on impacts on the rest of the economy remain severe combined with the much weaker export picture and loss of sentiment. Slowing credit growth is a new factor in the second quarter data that will be an additional drag, though real aggregate disposable incomes should remain supportive with a fall in inflation and government intervention minimising layoffs in the short run at least”.

Montalto added that “The SARB was partly expecting weakness as suggested in its weaker GDP forecast last week, but this still probably surprised it to the downside. We think this number is probably still not enough to tip the balance for the MPC and is simply the outcome of risks already highlighted, but it means that September remains in the frame for a possible cut even if it is still not our baseline given the weak rand and our bearishness on the labour situation. We expect some bounce back in the second half, but now from a lower base…”

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