SA policy uncertainty could push economy to recession in second quarter

CAPE TOWN- Despite relatively buoyant consumer spending figures and pledges for US$20 billion in Saudi investment, South Africa’s economy still faces the risk of further contraction, hurt largely by policy uncertainty, economists have cautioned.

Gross domestic product shrank by 2.2 percent in the first three months of 2018, weighed down by the agriculture, mining and manufacturing sectors, and another negative growh figure in the second quarter would entail a technical recession. 

Warnings of this sounded earlier this month as the value of banking transactions dipped to a five-year low and mining output figures for May pointed to a 16.2 percent year-on-year slump in gold.

Retail sales figures published on Wednesday offered some relief, showing a 1.9 percent increase in May over the same period last year, but coming months could see higher fuel prices, a one percentage point increase to 15 percent in value added tax and household debt levels make a dent.

“Household consumption expenditure makes up a significant two thirds of GDP, however the consumer demand environment remains constrained, weighed down by lacklustre household credit growth, increased consumer taxes and surging fuel prices,” Investec economist Lara Hodes said.

“Additionally unemployment levels remain unsatisfactory and household debt as a percentage of disposable income has lifted, from 71.2 percent to 71.7 percent. We therefore see it making a muted contribution to growth in Q2.18.”

Hodes said in order for mining, which contributes about eight percent to South Africa’s GDP, to make a positive contribution to second quarter growth, output would have to increase by over 3.8 percent on a month on month seasonally adjusted basis.   

In addition, manufacturing production, which accounts for about 13 percent of GDP, would need “to achieve at least flat growth on a month on month seasonally adjusted basis, in order to not detract from Q2.18 GDP”.

There was bad news on the mining front on Thursday as the Minerals Council said 80 percent of the country’ gold mines had become unprofitable.

Data from the body formerly called the Chamber of Mines showed that only 20 percent of gold mines, once the driving force of the local economy, were making money in a climate where the gold price had slipped to R520,000 per kilogramme.

Mining and labour analyst Mamokgethi Malopyane said she expected the sector to perform at even worse levels over the second quarter and for the remainder of the year, though individual companies may show healthy balance sheets as they scaled down operations.

“Collectively the sector is going to have a really hard time, I see this continuing for at least ten months and for as long as there is policy uncertainty,” Malopyane said.

Hodes stressed that policy certainty was a key factor in President Cyril Ramaphosa government’s drive to rebuild confidence in the economy and boost growth and job creation

“Crucial to lifting confidence, attracting investment and boosting economic growth is removing remaining uncertainties surrounding key issues, with land expropriation without compensation and the eradication of corruption and state capture key to this,” she said.

Former finance minister Trevor Manuel, one of the president’s special envoyees in his bid to attract US100 billion in investment over five years, said reassuring potential investors about the government’s plans to introduce land expropriation without compensation “is a bigger challenge than what we had thought”.

Malopyane said mining and land policy were interlinked, and both were subjects on which the governing ANC demanded internal consultation. She therefore did not see uncertainty on either being resolved as Ramaphosa, while aware of the economic imperatives, treaded carefully through the factional complexities of the ruling party ahead of 2019 national elections.

“It may seem strange to us but there are voices in the ANC that remind him that he was not elected, so maybe once his face is on the ballot paper and he is seen as having won a proper mandate, we will see a more decisive leadership and he will show a bit of his hand,” she said.

“At this point, we are seeing a man constrained by the internal mechanisms of his party.”

She added that in similar fashion, Mineral Resources Minister Gwede Mantashe’s stated desire to finalise the revision of a contested Mining Charter first by May, and then by June had fallen victim to the political pressures placed on him as chairman of the ruling party.

“It makes life difficult for Ramaphosa and for Mantashe, so it is going to take a while,” Malopyane said.

– African News Agency (ANA)