Wolf of recession howls even louder at the door

Long-held fears of South Africa slipping into a recession gained further traction yesterday after Stats SA confirmed a 1.2% contraction in the country’s gross domestic product (GDP) in the first quarter of the year.

Reacting to the announcement, Nedbank’s Economic Unit said the country’s economic outlook remained relatively bleak. Softer global demand, the global commodity price slump, rising domestic production costs and limited economic infrastructure were, it argued, likely to continue to weigh on mining and manufacturing, offsetting any likely competitive boost from a weaker rand.

Consequently, restructuring would probably continue in these sectors, resulting in cutbacks to capital expenditure and jobs among private firms.

“The slower pace of household spending is also expected to continue, given the stagnant job market, soft income growth and rising costs pressures ranging from surging food inflation and higher fuel prices to rising debt service costs. Consumption expenditure by general government will be boosted by election-related spending, but growth will be contained given the need to minimise wasteful expenditure and exercise fiscal discipline against the backdrop of limited revenue and rising government debt burdens,” it predicted.

Overall, the bank said the economy would probably struggle to grow in 2016, but was expected to expand by 1% in 2017.

Ratings agency Fitch also announced yesterday that it retained its one-notch-above-junk credit rating as well as its stable outlook for South Africa. It noted in a statement, which was released within minutes of the GDP announcement, that it expects continued low GDP growth.

The primary sectoral contributor to the GDP contraction was the beleagured mining and quarrying industry, which contracted by an alarming 18.1% following lowered production of platinum group metals and iron ore.

Further contributing to the economic downtick, the transport, storage and communication industry narrowed by 2.7%, largely as a result of a decline in passenger and freight land transportation.

Household final consumption expenditure decreased by 1.3% in the first quarter, reflecting increased pressure on consumers, with transport the main source of the decline in spending.

Conversely, government final consumption expenditure increased by 1%, while gross fixed capital formation decreased by 6%. In terms of trade, a positive change in inventories was observed in the first quarter, said Stats SA.