Tuesday, August 25, 2015

Shock as South African Economy Unexpectedly Shrinks by 1.3% in Second Quarter
25 AUG 2015 16:04

Agriculture shrank by a whopping 17.4%. "South Africa needs to have a shock to the system...to shift the political status quo," says analyst.

Africa's most advanced economy has struggled due to the electricity crisis and high unemployment as well as a fall in commodity prices and the rand.

SOUTH Africa’s economy unexpectedly shrank in the second quarter, data showed Tuesday, raising fears of a recession as gross domestic product fell by an annualised 1.3%, surprising analysts who had predicted a small rise.

The slowdown was across the board, with manufacturing, mining and agriculture industries lagging the most in Africa’s most developed economy, plagued with nationwide power cuts and high unemployment.

“The real economy in the second quarter has performed negatively,” Statistician-General Pali Lehohla told a press briefing in Pretoria.

In a commentary note on Monday, Nedbank had predicted GDP growth of 0.3% after first quarter expansion of 1.3%.

The economy has struggled due to the electricity crisis and unemployment of about 25 percent, as well as a slump in commodity prices and the falling rand.

The rand hit an all-time low on Monday, breaching 14 to the dollar as jittery investors disposed of high-risk assets in the wake of slowing economic growth in China.

Lehohla said that for South Africa to capitalise on the weak rand, the government would have to address deep-rooted issues hampering growth.

“Things being equal one would have expected manufacturing would boom when the rand touches 14 a dollar,” he said.

In July, Lesetja Kganyago, governor of the South African Reserve Bank, revised down the bank’s growth forecast to 2.0% in 2015 and 2.1% in 2016.

“One can’t rule out the possibility of a recession in South Africa,” Jana van Deventer, an economist at ETM Analytics, told Bloomberg News.

Compounding things further, South Africa is suffering from the worst drought in years which has damaged its profitable corn crop.

Load-shedding—regularly scheduled power cuts to reduce energy usage—has become part of everyday life for many people and companies.

State-owned power utility Eskom, which generates more than 95% of the country’s electricity, has been weakened by years of underinvestment and ageing infrastructure, as well as governance problems.

Tuesday’s statistics revealed manufacturing contracted by an annualised 6.3%, mining also by 6.3% and agriculture by a whopping 17.4%

“I think the shock just came home much more quickly than we thought it would do,” said Peter Montalto, economist at Nomura.

“Particularly on manufacturing and agriculture, it was a surprise for us.”

Montalto said it was unlikely that South Africa’s government would make any big policy changes soon.

“Part of the problem, to be honest, is this slow grind of under performance,” he said.

“South Africa needs to have a shock to the system, which it arguably has had through Eskom, but that hasn’t been enough to shift the political status quo.”

South Africa's ailing economy shrinks in Q2

Financial Times

More bad news for the South African economy, which is at risk of becoming caught in an ugly "stagflation" trap.

South Africa's GDP in the second quarter dropped 1.3 per cent on an annualised basis compared to 1.3 per cent growth the previous quarter.

The FT's Andrew England in Johannesburg notes that it is the economy's first quarter-on-quarter contraction since the first three months of 2014. The beleaguered mining sector contracted by 6.8 per cent as a result of lower production in coal and iron ore, while manufacturing shrank by 6.3 per cent.

While South Africa's economy has been in no great shape for a while and the rand has been among the emerging market currencies that have taken a heavy beating recently as commodity prices slump, fears grow over the health of the Chinese economy and a US interest rate rise draws nearer, the second quarter result is still far worse than expected. Economists polled by Bloomberg had anticipated growth to slow to 0.6 per cent on an annualised basis between April and June.

As the FT's Dan Bogler explains here, South Africa is at risk of being caught in a trap of weak economic growth and rising prices. While South Africa economy is exposed to commodity prices, which are going nowhere fast at the moment, consumers have also been cautious amid concerns over high unemployment and debts while the economy has also been hampered by electricity shortages.


Stephen Grootes
Eyewitness News

JOHANNESBURG – As the turmoil continues in global markets this morning, economists say the declining value of the rand and the problems in the Chinese economy mean South Africans are going to feel poorer.

But personal finance experts say consumers should not panic.

Monday saw Chinese markets losing eight percent of their value, and the rand touching its lowest ever point to the dollar.

European markets also saw €400 billion in value being wiped out.

Liberty Life economist Tendani Mantshimuli says our economic situation is a grim picture.

“Going forward, there doesn’t seem to be a silver lining of where growth is coming from, especially if what’s happening in the global market is going to persist for a longer time.”


This morning, China is still down, but the rest of the Asian markets seem to be making a slight recovery, clawing back some of the losses seen on Monday.

That mood is likely to carry across the oceans and may reflect on how the JSE performs, with trade opening in two hours’ time.

Vestact market analyst Sasha Naryshkine says, “I suspect we’ll see a lot more green across our screen for the rest of the day.”

He says all things considered, the JSE has outperformed other stock exchanges.

“Don’t get spooked. Don’t think the world is ending. We’ve seen this many times before. Keep calm and carry on.”

After breaking through the R14 to a dollar mark on Monday, South Africa's currency is now back down to just over R13 to the dollar.

The rand/pound exchange is also looking a little healthier at R20,73 cents to the sterling.

Financial advisor Paul Roelofse says South Africans should be careful before changing any of their investment decisions.

“If you’ve got a 10-year horizon then generally this correction will certainly just be a blip on the screen, but if you have a short term horizon I suppose it’s going to really affect your capital.”

He says that this correction has been predicted for some time.

Mantshimuli says everyone will feel the impact of this turmoil.

“If the rand continues on its downward slide and the decline is long time, you’re definitely going to feel it in your inflation. As someone who holds shares you’re definitely going to feel much poorer.”

But Roelofse says it's important to simply not panic about your investments.

“You’ve just got to step back and say, ‘How long am I prepared to stay in this market?’ And the longer the term this will be a lot more smoother in terms of a ride for risk.”

He says this is a difficult situation but it was expected.

(Edited by Tamsin Wort)

No comments: