Slippery slope for economy
THE jury is still out, but there is a real risk that the economy could contract again in the second quarter, ushering the country into a recession for the second time in five years.
Reserve Bank governor Gill Marcus and Finance Minister Nhlanhla Nene have insisted that economic output will rebound, but this is far from certain, given labour unrest that has hobbled mining and manufacturing.
“I think avoiding a technical recession in South Africa in the first half of the year will be a narrow squeak as the risks are high,” said Investec economist Annabel Bishop. “While I currently think South Africa will avoid this by the skin of its teeth, this is only if the platinum strike ends this week and no more significantly disruptive strikes begin.”
The Association of Mineworkers and Construction Union has so far rejected government-led efforts to end the platinum mining strike, which it launched in January, costing mineworkers more than R9.4-billion in pay and mining companies more than R21-billion in revenue.
At the same time, the National Union
SIGN OF TIMES: A man begs at a Johannesburg billboard of Metalworkers of SA (Numsa), the country’s dominant manufacturing union, has warned it will down tools at the start of next month if its demand for a 15% one-year wage increase is not met.
Numsa spearheaded last year’s automotive-industry strike, which cost the economy more than R20-billion.
“We’re hoping for a resolution to the platinum strike this month and no other labour disputes — then we can avoid a technical recession,” said Stanlib economist Kevin Lings.
Two consecutive quarters of contraction in economic output meet the tech- nical definition of a recession.
Regardless of that outcome, the 0.6% contraction in gross domestic product (GDP) recorded in the first quarter will probably prompt credit-rating downgrades for South Africa when Fitch and Standard & Poor’s publish their updated assessments of the economy on Friday.
Standard Bank analysts think there is a greater-than-50% probability that S&P will downgrade SA’s sovereign foreign currency rating to BBB- from BBB — the lowest rung of investment grade status.
Fitch may not downgrade South Africa, but it is likely to change the outlook on its BBB rating for the country to negative from stable. Credit ratings matter as they help determine a country’s cost of borrowing and influence investor sentiment.
Apart from the direct hit to the economy, lower-than-expected growth will erode tax revenue, forcing the government to borrow more and tarnishing SA’s fiscal credentials.
All the signs now suggest that even if South Africa does not slide into a technical recession, growth this year will fall well short of 2.1%, the latest projection of the Reserve Bank, which was shared by many analysts.
The biggest red flag was raised on Monday by news that Kagiso Purchasing Managers’s index, a gauge for the manufacturing sector, dropped to 44.3 in May from 47.4 in April — its lowest level since September 2009. That took it further below the neutral 50 level separating expansion from contraction .
This is ominous as manufacturing, which accounts for about 15% of gross domestic product contracted 4.4% in the first quarter, subtracting 0.7 percentage points from overall output. That was due largely to a dramatic 24.7% contraction in the mining sector, which has strong links with suppliers in manufacturing.
“I think we’re in a situation where we’ll see lasting damage — some companies may close. Manufacturing will shrink,” said Coenraad Bezuidenhout, executive director of the Manufacturing Circle, an industry body.
A business confidence index released by the South African Chamber of Commerce and Industry on Thursday sank to 88.9 in May from 92.6 in April — it’s lowest level since 2000.