Recession stalks SA as economy shrinks 1,8%

Mariam Isa

SA’s economy has contracted for the first time in a decade, with output sliding 1,8% in the fourth quarter of last year, signalling the country may have slipped into recession.

Manufacturing was the main culprit behind the steepest fall in output since 1992, data from Statistics SA showed yesterday.
Output plunged by a record 21,8% as the deepening global downturn eroded local exports.
The bigger than expected fall in gross domestic product (GDP) hardened speculation that the Reserve Bank may cut interest rates ahead of its next policy meeting in mid-April.

“The data serve as the first real sign that the South African economy could be in the midst of a recession," said Absa Capital economist Monale Ratsoma.

“Going into 2009, we project the first quarter figure will show a contraction of around 1,5%."

A recession is defined as two quarters running of shrinking economic output. Stats SA left its growth estimate for the third quarter unaltered at 0,2%, but that could change in the future.

The data backed the case for the Bank to call an unscheduled meeting of its monetary policy committee (MPC), as its governor, Tito Mboweni, has hinted, possibly even this week.

If that happens, it is likely that the MPC will cut interest rates by a full percentage point for the second time this year, reducing the repo rate to 9,5%.

Markets have already priced in the move, although analysts say the Bank will wait for today’s inflation figures before making the call. Revamped consumer price data are expected to show inflation subsided to 7,5% last month from 9,5% in December.

“With the economic growth outlook deteriorating further following today’s figures and adding to that the expected drop in inflation, the Bank has ample scope to cut interest rates more aggressively," said Elize Kruger, economist at Thebe Securities.

The Bank’s next scheduled policy meeting is in mid-April, but as changes in interest rates take up to two years to make themselves fully felt, the further anticipated rate cuts could be “front-loaded" this year.

Market consensus forecasts had predicted the economy would contract 1,2% in the fourth quarter of last year, seasonally adjusted and annualised. Compared with the same quarter in 2007, GDP rose by an unadjusted 1%, sharply down from 3% in the third quarter.

The drop in factory output, SA’s second-biggest sector, reflected waning global demand for exports as well as a downturn in consumer spending, which comprises 60% of GDP.

Manufacturing contracted 9,4% in the third quarter, revised from a previous estimate of 6,9%, the data showed.

“The magnitude of the drop in manufacturing was serious enough to bring everything else down," said Stats SA deputy director-general Rashad Cassim. “We were surprised by how robust some other sectors were."

Electricity production curbed output, falling 2,7% in the fourth quarter. Retail sales eased a modest 0,2%, still marking the third successive quarter of contraction. The sector is the economy’s third biggest, and has been hardest hit by soaring inflation and higher interest rates, which have boosted debt costs and eroded incomes.

Mining output nudged up 0,4% after diving 8,8% in the third quarter of the year. But two of the smallest sectors helped offset bad news elsewhere. Construction leapt 10,8% in the fourth quarter, supported by state infrastructure plans.

Agriculture rocketed 16,7% as ample rainfall boosted maize crops.

Financial services, the biggest sector, rose 3%, similar to the pace set in each of the previous two quarters. This was a reassuring message that SA’s banking sector has been well protected from the global credit squeeze.

“The figures highlight SA’s dependence on the world economy, and also suggest that the risk of slipping into recession has probably increased sharply,” said Nedbank economist Nicky Weimar. This was likely to lead to a further fall of three percentage points in interest rates this year, she said.

Source: www.businessday.co.za

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