Recession risk

Government is urged to review its policies

SOUTH Africa’s economic paralysis has deepened, raising the risk that the country might be in the throes of a recession after a report showed yesterday that the economy had contracted in the second quarter.

The latest report on the gross domestic product (GDP), the broadest measure of the value of all goods and services produced within the country’s borders, is an indictment on President Jacob Zuma’s administration, which analysts blame for dithering in the face of a damaging power crisis, costly drought and worsening levels of business confidence.

Figures from Statistics SA showed that GDP shrank by 1.3 percent in the quarter to June after rising by 1.3 percent in the preceding three-month period. It is the second quarterly contraction since the economy emerged from the last recession in 2009. Economists polled by Bloomberg had expected GDP to gain 0.6 percent.

Eskom

But without a clear strategy to fix policy shortcomings, stabilise the mining industry, boost foreign investment and raise the levels of education, analysts say growth will keep eluding South Africa, creating a vicious cycle of high unemployment, deepening poverty and rising inequality.

“The Eskom shock finally hit home and this is even as the China and terms-of-trade shocks are only starting to build,” Peter Attard Montalto, the emerging markets economist at Nomura, said in his reaction to the latest GDP figures.

“The current government narrative is that this is due to international forces; however, this ignores the fact that policy choices have left very weak foundations.”

Eskom has become possibly the biggest obstacle to growing the economy as it struggles to ensure uninterrupted electricity supply to drive the economy. The mines, big manufacturers, other industrial users and even small businesses have borne the brunt of Eskom’s load shedding – fancy shorthand for power cuts. Although the government has promised to fix Eskom, the utility has still not found an answer to the delays that have crippled construction of the country’s two newest coal-fired power stations, Kusile and Medupi.

The latest GDP figures revealed the extent of the damage incurred by key sectors – from agriculture to manufacturing to mining – as domestic structural impediments collided with global factors to stifle growth. Manufacturing, which accounts for about 13 percent of GDP, shrank for a second consecutive quarter.

Construction and retail also saw growth moderating, but finance showed strong performance.

The number put into serious doubt the Treasury’s forecast for 2 percent overall growth this year. The data also raise concern about the government’s own revenue targets since tax collection falls in a period of economic contraction.

It also complicates the outlook on interest rates since the Reserve Bank has been sounding hawkish as it tries to put a lid on inflation.

The rand, however, shrugged off the GDP data, and recovered yesterday after sliding to a record low of R14.06 against the dollar on Monday amid a global market rout. At 7pm, the rand traded at R13.07 versus the dollar.

Equity markets also bounced back as investors found relief from China’s move to slash interest rates once more as the world’s second- largest economy wrestles with slowing growth. Even so, the GDP figures put the spotlight on South Africa’s own structural deficiencies.

The SA Chamber of Commerce and Industry (Sacci), which represents more than 20 000 small, medium and large enterprises in the country, yesterday called for a clear directive to attract foreign direct investments and stimulate growth.

Sacci economist Richard Downing said the government had not provided leadership as the country entered its worst economic crisis in years and the potential of massive job cuts dominating negotiations between business and trade unions in recent days.

Downing said besides the economic turmoil that had gripped most developing economies following China’s devaluation of its currency, South Africa had already lost favour with global investors.

Policies

“We need a clear statement from the government that certain policies are going to be reviewed and that the country knows where it is going,” said Downing. “At the moment we seem to be doing more talk and less action and that is not attractive to investors.”

Economist Chris Hart said the second-quarter economic contraction showed massive structural problems in the country. Hart said even if China had dragged most emerging economies down with it, South Africa’s economy should have been able to withstand the shocks.

“We don’t have a currency crisis we have an economic crisis which has pushed us into recession because of internal structural issues. In an ideal world you would want investors to stay with you during bad times but in South Africa they are not doing so because our very own policies are chasing them away.” – Additional reporting by Ellis Mnyandu @Ellis_Mnyandu)

The latest GDP figures revealed the extent of the damage incurred by the key sectors.