Tuesday, August 25, 2015

South Africa’s Economy Contracts Unexpectedly in Second Quarter
South Africa President Jacob Zuma addressing parliament.
GDP shrinks 1.3%, with economists hnaving forecast expansion of 0.6%

Aug. 25, 2015 12:59 p.m. ET

South Africa’s economy took a steep and unexpected plunge in the second quarter, underscoring worsening dysfunction that has sent its currency to record lows amid a global rout of vulnerable emerging markets.

Africa’s most developed economy contracted an annualized 1.3% in the second quarter, data released on Tuesday showed, far worse than the 0.6% expansion economists had expected. South Africa’s economy grew 1.3% in the first quarter.

It was the worst quarterly performance in a year and the second-worst since the global financial crisis. The dip means growth this year will likely fall near the 1.5% mark recorded in 2014.

In South Africa, such tepid growth feels like recession. A quarter of the workforce is unemployed and more than half of people under 25 years old. Widening inequality has driven an increase in crime and violent attacks on shop owners and laborers from poorer African countries.

“The government, they are not helping,” said Phila Mkhize, a 26-year-old Johannesburg native who wanted to train as a paramedic after graduating from high school but couldn’t afford the courses. Now he works as a security guard at one of the city’s many malls.

“It’s very hard these days to find a job,” he said.

Tuesday’s grim growth figure was the latest sign that things are getting worse. Investors reacted by selling South Africa’s rand back to near the all-time low beyond 14 to the dollar it hit on Monday.

The rand is only the most widely traded among African currencies to take a tough beating this year from investors who are dumping risky assets around the world. Currencies in countries including Ghana, Zambia and Uganda have slumped by as much as 20% this year.

The data were grim news for South African policy makers already confronting market turmoil and domestic obstacles of their own making. South African mines and factories are suffering from the slowdown in China, its top trading partner. The failing electricity grid and regular strikes have prevented them from using the weaker rand to make their exports more competitive.

Companies like Harmony Gold Mining Co. Ltd. are reassessing the lifespans of their mines as those headwinds run up against lower commodity prices. Electricity costs have more than tripled between 2008 and 2014, according to the Chamber of Mines of South Africa, thanks to a lack of maintenance and updates to aging infrastructure.

Without urgent reforms, “you start talking more straws on a camel’s back,” said Srinivasan Venkatakrishnan, Chief Executive of Johannesburg-based AngloGold Ashanti Ltd., the world’s No. 3 gold producer. Already some miners, including Lonmin PLC, have said they may cut tens of thousands of jobs.

“Something has to give,” said Johannesburg-based Citi economist Gina Schoeman. “The current trajectory we’re on is simply unsustainable.”

And yet policy makers have demonstrated little will to act.

The poor growth figures make the conundrum facing South Africa’s central bank even more confounding. The bank wants to raise interest rates to prop up the rand. But tightening credit could freeze up growth even further.

President Jacob Zuma’s administration has demonstrated even deeper policy paralysis, economists say. In the years since the global financial crisis, the government did little to build up financial buffers. External debt has risen steadily, to about 40% of gross domestic product.

The World Bank last week urged the government to curtail public wages and reform labor laws, to reassure investors and free up cash to build new power plants. Failing such moves, the bank warned South Africa could slip into a quagmire of low growth and deep inequality.

“The important thing now is to take advantage of time left and, critically, to address the challenges that the global economic environment is creating,” said Catriona Purfield, the bank’s economist for South Africa.

Write to Patrick McGroarty at patrick.mcgroarty@wsj.com and Alexandra Wexler at alexandra.wexler@wsj.com

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