GDP slows due to contraction in mining

South Africa’s economic growth rate slowed to 2,1% in the first quarter of 2008 on a seasonally adjusted and annualised basis, official data showed on Tuesday, citing a sharp drop in mining due to a power crisis.

Statistics South Africa said Q1 GDP on a seasonally adjusted and annualised basis slowed from 5,3% in the fourth quarter of 2007, and was the lowest figure since the third quarter of 2001.

The number was well below the forecast from a Reuters poll of economists, which saw the economy growing by 2,4%.

On an unadjusted basis, South Africa’s economy grew by 4% compared to the first quarter of 2007.

Worse than expected

Monale Ratsoma, economist at Absa Capital, said: ”It’s worse than expected, and the reason for that is a decline in mining production which is reflective of power outages that escalated in January this year. Elsewhere, the finance sector is slowing down and that is a reflection of high interest rates and slowing consumer spending.”

Mike Schussler, economist at T-Sec, said he had expected the figure to slow down even more dramatically during the quarter, and felt that ”we are lucky to even get over 2% quarter-on-quarter growth”.

”These figures make it very unlikely that we will see 4% — even 3% — growth this year.”

Annabel Bishop, economist at Investec, said demand was waning due to higher interest rates and predicted this was likely to continue to be a feature in 2008.

”However, substantial load shedding in Q1.08 was also responsible for the marked slowdown.

”Economic growth should pick up somewhat in the rest of the year, but 2008 is unlikely to average more than 3,8% — and even this modest growth rate will be at risk if substantial load shedding is reintroduced or interest rates tightened substantially further.

”Despite the sharp rise in CPIX inflation to double digits it may not yet have peaked. If Eskom gets approval for a tariff hike of at least 30% this year (although they asked for above 60%), CPIX inflation will rise above 10,5% in Q3.08 from its current 10,1%. It would probably have fallen back within the target range in Q3.08 if only the currently approved 14% Eskom tariff hike was implemented.

”With a 30% tariff hike this year and another next year, CPIX inflation will only be back below 6% by 2010 (although even this re-entry will be threatened if annual tariff hikes of at least 30% become the norm).

”With or without higher approved Eskom tariff increases the risk of further tightening in interest rates [after June’s 50bp increase] remains.”

Dennis Dykes, economist at Nedcor, said while the figure was ”pretty much in line” with what he was expecting, it was nevertheless disappointing.

”But I think given the various factors weighing against the GDP in the first quarter, it’s not surprising that it has softened — high interest rates, electricity, the gloomy global sentiment which also filtered through. We also knew that manufacturing and consumer sentiment was weak early in the first quarter.”

Razia Khan, economist at Standard Chartered Bank, said: ”We had forecast q/q growth of 2,2%. The Q1 print was 2,1% — much weaker than the consensus of 2,6% q/q.

”The headline-grabber here will obviously be the sharp contraction in mining, down 22%. The energy crisis and the forced closure of the mines have far outweighed any beneficial impact from higher commodity prices, but it is important to put this in context as a likely one-off. Although mining growth should remain subdued given the energy-sector problems, a repeat performance that is anything as weak as this is somewhat improbable.

”Of more interest is the evidence of gradual deceleration in other sectors of the economy, including financial services that had previously done well. The growth rate is now weaker. Manufacturing contracted, but growth was supported by a favourable quarterly performance in agriculture.

”In all, the data is unlikely to have too much significance for the SARB [South African Reserve Bank]. GDP is in some respects too backward looking, and while the weakness in the economy will count for a bit, it is the inflation fears that are overriding.

”We still believe that rates will be hiked 50 bps in June, and that may not be it in terms of this tightening cycle. Further tightening beyond June is more likely than not.” – Reuters, I-Net Bridge

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