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Analysis

South Africa Economic Outlook, Q3 2009

By Kavitha Cherian

Executive Summary

  • A shrinking manufacturing and mining sector and falling domestic demand pushed South Africa into its first recession in 17 years;
  • The Reserve Bank’s monetary easing should help stimulate growth;
  • Infrastructure and investment for the 2010 World Cup football (soccer) tournament could partially offset the external slump.

Dismal performance by the manufacturing and mining sector, which accounts for a third of exports, dragged the South African economy to its second consecutive quarter of contraction in Q1 2009. The negative growth of 6.4% in Q1 pushed it into its first recession in almost two decades. Given the weak outlook, RGE Monitor has revised downward its previous estimate to a year on year contraction of 2.5-3% in 2009.

South Africa, the third largest world producer of gold, and a key producer of several other key metals, has been hit by weakening local and international demand resulting in declining output and widespread shedding of jobs. The effect of job losses and wage declines in such a crucial sector has curbed household spending.

Private consumption, the major source of growth in recent years, has likewise been slowing due to asset price declines, slower credit creation and reduced spending. Retail sales reflect this weak outlook and have been negative for eleven out of the last twelve months ending April 2009. The outlook for this sector relies on underlying drivers such as employment and disposable income which may take well into 2010 to improve given that labor market indicators tend to lag. However, government spending to boost jobs might slow some of the decline that has led to a further deterioration of South Africa’s chronic unemployment (above 23% in Q1 2009). Jacob Zuma, the country’s newly elected president, pledged to create half a million job opportunities by the end of 2009 through public work programs. These policies might come with a high cost—these and other measures may worsen the country’s fiscal deficit to more than 3.8% of GDP in 2009 from 1% in 2008 (following surpluses in prior years).

South African monetary policy should begin to be supportive of growth. The Reserve Bank of South Africa has cut interest rates five times since December 2008 for a total of 450 basis points in cuts. The easing cycle may be at an end as of mid-2009 and past cuts may ease the credit crunch.  Inflation has been easing through 2009 but remains above the Central Bank’s threshold of 6% in 2009.

South Africa’s chronic current account deficit worsened as imports and exports plunged. The export decline exceeded that of imports by three times.  South African exports have been hit by both the fall in global demand as the real output of South Africa's leading trading partners have been adversely affected. More recently, the increase in the rand could lead to renewed deterioration as it has strengthened along with commodity prices and increased risk appetite for emerging market assets. The end of South Africa’s easing cycle could be supportive of the rand.

South Africa’s infrastructure investments in preparation for the 2010 FIFA (soccer) World Cup tournament should support growth by adding jobs and tourism inflows, even if official estimates of its economic benefits may be overstated.

Capital inflows in the form of foreign direct investment continued through the first quarter of 2009 although at a slower pace. The effects of monetary easing should begin to see positive effects in the second half of the year resulting higher personal consumption. The positive outlook for commodities and gold in 2009 presents a certain degree of reprieve to South Africa that is an export driven economy.

The Zuma government, elected in April, appointed Trevor Manuel, the former finance minister, as the head of the new national planning commission in a move that was widely viewed as a good balance between continuity and reform. The peaceful election and transfer of power, only the second since the end of the apartheid, may lessen investor fears.

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