Economic storm 'more ferocious than thought'

Director General of the National Treasury Lesetja Kganyago said on Tuesday, in reaction to news of South Africa’s first recession since 1992, that it needs to be seen in the context of the world economy contraction of 1,3%, but that the economic storm is more ferocious than initially thought.

“As a country we took decisions earlier to cushion the economy, but the storm is more ferocious than initially thought,” he said. “We are less bad than we would otherwise have been had we not done anything.”

He also noted that there were some tentative signs of improvement in the world economy.

“Our slowdown is less severe than in most countries,” said Kganyago.

Meanwhile, Tuesday’s GDP figures were described as “shocking” by economist Mike Schussler.

“If you just look at what’s happened to mining according to the data, the size of the sector is what it was back in the fourth quarter of 1961,” he said.

“And if you look at the manufacturing sector, this is its biggest decline ever.”

Earlier, Statistics SA said seasonally adjusted real GDP for the first quarter of 2009 decreased by an annualised rate of 6,4% compared with the fourth quarter of 2008. In the last quarter of 2008, the economy shrunk by 1,8%.

The two consecutive quarterly contractions put South Africa in its first recession in 17 years.

Schussler said given the size of the GDP contraction, it was imperative for the government to support business.

“Stop making radical pronouncements and clear the way for business.”

Asked if the GDP figure would make the South African Reserve Bank cut rates by more than 100 basis points, Schussler said he doubted there would be a cut larger than this, given that inflation was still “sticky”.

Kganyago also said that while the GDP figures released on Tuesday confirm that South Africa is in a recession, the economy is expected to improve in the final two quarters of this year.

“Looking ahead, we expect another quarterly contraction for the second quarter, but this is expected to be smaller.”

Quarter-on-quarter figures are expected to show improvement and a stronger economy in the second half of 2009, the Treasury said.

But it added: “We are unlikely to achieve the GDP growth rate for this year expected at the time of the Budget.”

Domestically, it said, interest rates have come down by 350 basis points since last year as inflation has moderated from the highs of 2008. This monetary easing will help to improve credit conditions, ease pressures on consumers and small businesses, and raise growth rates.

“There is a lot going for South Africa. We are in a strong fiscal position, which means that we are able to respond to this crisis without putting an undue burden on future generations. This underlying strength in the South African economy has meant that this slowdown is less severe than in many countries. The fiscal stimulus announced in the 2009 Budget has supported economic activity, especially in infrastructure, prolonging growth in the construction sector. The inflows of tourists for the Confederations Cup, and private and public investment ahead of the World Cup, are also expected to provide support to the local economy.

“These factors are expected to continue to support economic activity in the medium term.

“While indicators of real economic activity are expected to remain weak in coming months, some tentative signs of improvement in the world economy suggest that the global contraction may have bottomed-out. Commodity prices, capital inflows and indicators of purchasing managers’ outlook in some key global economies have stabilised and even strengthened,” the Treasury said.—I-Net Bridge, Sapa

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