By: Sonia Hendricks
Statistics South Africa (Stats SA) recently released a report indicating that the South African economy tightened more than expected in the first quarter of the year, increasing the likelihood of South Africa’s first recession in seven years.
Gross domestic product (GDP) data from Stats SA showed that the economy shrank by 1.2% in the first quarter of 2016 compared with growth of 0.4% in the fourth quarter of 2015.
The Reserve Bank had expected the annual figure to be “barely positive”‚ following the year-on-year growth of just 0.5% in the last quarter of last year. However, this tightening is considerably worse than expectations.
The major negative contributor to growth in GDP in the opening quarter was mining and quarrying, which dropped by 18.1% and contributed -1.5 percentage points to GDP growth, Stats SA said.
Transport, storage and communication declined by 2.7%, which contributed -0.2 of a percentage point to GDP growth.
At the moment, the agricultural sector is not doing well due to the country’s drought.
Another industry that contracted in the first quarter is electricity, gas and water.
According to reports, around 2 000 jobs will be at risk, if the country is lowered to a sub-investment rank.
Standard Bank’s Chief Economist, Goolam Ballim, said that the downgrade will see South Africa slip into a recession.
With food prices on the rise, the unemployment rate increasing and inflation over 6%, the last thing that South Africa needs is a downgrade.
Ballim said a downgrade will put more pressure on the current challenges that the country is already dealing with.
He claims that over the last seven years, because of the “idiosyncratic failures” relating to electricity challenges to the “wretchedness” of our political economy, about 1 million job opportunities have been forsaken.
The weak economy is already lending the country to job shedding and the risk of a further possible downgrade will further reinforce the instability of the labour market.
Finance, real estate and business services increased by 1.9%, which contributed 0.4 of a percentage point to GDP growth.
Since the 1940s‚ the Reserve Bank and Stats SA have divided the measurement of GDP between them‚ with the Bank measuring GDP from the expenditure part of the economy and Stats SA responsible for using the production approach.
International credit rating agencies have also recently increased their attention on political factors in their assessments of South Africa‚ sluggish economic growth remains one of the key factors they mention as being a risk for a downgrade.
The weaker rand, joined with higher fuel prices, have been applying pressure on the economy.
Tension between President Jacob Zuma and Finance Minister Pravin Gordhan is also one of the political elements causing concern. The government has been at pains to disapprove talk that there is a war between them‚ and suggested that they both attended a meeting to discuss how to boost economic growth and strengthen state-owned enterprises.
Analysts see little possibility for further tightening as growth struggles. In addition, raising interest rates could alienate the ruling African National Congress’s supporters before local governments elections in August, where the party is expected to face a stiff challenge by the opposition.
Economist, Goolam Ballim also suggests at some point the local currency is likely to weaken further should the country be downgraded leaving poorer households under enormous pressure.
Critics blame President Jacob Zuma for the economic condition, demanding that he resign for changing finance minister twice in one week last December, triggering market turmoil. Zuma has however held on with the backing of his ruling party.
It is expected that growth for next year is likely to come in at 1.2%, whilst cumulatively for 2016 is seen at 0.6%.
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