The latest GDP data on Tuesday confirmed that South Africa’s economy has shrunk for the first time in 10 years, increasing the chance of the reserve bank lowering interest rates before its next scheduled meeting in April.
On Tuesday economists were warning that South Africa might already be in recession, with manufacturing ouput at its worst level since 1960 and car makers approaching the government for a R100-billion bailout package.
”We have been hit by the global situation and anyone who thinks we are not in a recession is wrong. We are in one now,” said economist Mike Schussler.
Old Mutual economist Rial le Roux said that ”depending on this week’s January inflation data, the bank could announce [an interest rate cut] by the end of the week.”
Reserve Bank governor Tito Mboweni said early in February, shortly after announcing a 100 basis points cut in the repo rate, that the Monetary Policy Committee (MPC) could call a special meeting if GDP data disappointed.
Schussler agreed that ”an interest rate cut is likely, but the lower inflation data expected [on Wednesday] will certainly open the door for interest rate cuts.”
On Tuesday Statistics South Africa said the economy declined for the first time in a decade in the fourth quarter of 2008, with GDP shrinking by 1,8% quarter-on-quarter on a seasonally adjusted and annualised basis, from 0,2% growth in the third quarter.
Le Roux said the data confirmed that the economy had been hard hit by the combination of the rise in interest rates during 2006/8 and, more recently, the global economic slump.
However, he advised that investors should avoid ”over-reacting to this piece of bad news” and stay focused on the longer-term picture.
”We had expected an annualised decline of -2,0% in GDP for the quarter, so the actual data was a little better than our own forecasts,” Le Roux said.
Nevertheless, this was the first time since the third quarter of 1998 that the economy had actually contracted, he said.
Prospects were not promising, he added.
”The deepening global downturn will continue to negatively affect South African exporters, while the sharply weaker outlook for the world economy and uncertain prospects locally will likely cause local companies to postpone or even scrap capital expansion plans.”
Le Roux said a closer look at the GDP data revealed wide sectoral differences.
While the large manufacturing sector contracted at a record 21% annualised pace and electricity output by -3%, agriculture grew at a 17% annualised pace, construction 12%, government services 4% and finance and real estate by 3%.
While the broader economy was set for a difficult period ahead, consumers, who bore the brunt of the adjustments in 2008, should experience some relief in the months to come, Le Roux said.
”While job shedding by companies is an undeniable risk to many consumers, lower interest rates, increased government social transfers, lower petrol prices, tax relief and a slowdown in general inflation should provide relief to most.”
Strategies needed to soften meltdown
Meanwhile, King Hlanga Lomhlabathi on Tuesday challenged delegates at the International Cooperatives Conference in Durban to come up with strategies to
”soften” the negative impact of the global economic meltdown.
He said one way to improve the economy was to promote entrepreneurship.
The conference is a first of its kind and was held at Durban’s International Convention Centre.
Lomhlabathi, African National Congress president Jacob Zuma, Durban Mayor Obed Mlaba and delegates from neighbouring countries were among the dignitaries at the red-carpet affair.
Lomhlabathi said South Africa was the top destination in Africa and accounted for 63% of all conferences and activities on the continent.
”We are so rich … Life is not going to end at 2010. It will go beyond 2010. It is our duty to tell our people to work, to be ready to get those millions of dollars that will be flocking into Africa.”
He urged the tourism sector to put together an attractive cultural package for the 2010 Fifa World Cup so that tourists would be introduced to the diverse cultures in South Africa.
”We must encourage people in rural areas when tourism is so attractive. It will bring a lot of money to the community,” said Lomhlabathi.
Zuma, meanwhile, spoke about using cooperatives to speed up rural development.
”We are prioritising rural development in the next administration… we must take advantage of cooperatives and double the speed of rural development.” — Sapa