The South African economy is in for a rough ride in coming months. This week gross domestic product (GDP) figures indicated a continued trend of slow economic growth with inflation on the rise. But South Africa’s hands are tied as the underperforming sectors — mining and manufacturing — are subject to the eurozone debt crisis.
The economy grew at a disappointing 1.4% in the third financial quarter of the year, compared with 1.3% in the previous quarter. It had grown at 4.5% in the beginning of the year.
Kevin Lings, chief economist at Stanlib, said the 1.4% did not tell us much about the growth of the economy but rather about where the weaknesses were — agriculture, mining and manufacturing. Agriculture contributed -0.1% and manufacturing -0.3%, whereas mining and quarrying subtracted 0.9% from this quarter’s growth, with a big factor being the strike action.
Sectors such as retail and finance surprised on the upside, contributing 0.7% and 0.9% respectively. In part, Lings said, South Africa was helpless to boost the weaker industries and, because of global issues, exports would continue to struggle.
Annabel Bishop, group economist at Investec, said the primary sectors were in recession as they were particularly vulnerable to the global crisis because Europe was South Africa’s second-largest export market.
Even so, Lings said, in a global context, South Africa was “mid-pack” as far as growth was concerned. Ideally, growth needed to be higher than it was and South Africa was lagging behind other emerging markets. But it had fared better than economies such as Europe and the United States. China’s growth slowed to 9.1% in the third quarter and India last reported a growth of 6.9%.
Given the eurozone debt crisis, it is uncertain how long the global slowdown will last. Two weeks ago Reserve Bank governor Gill Marcus said the monetary policy committee’s growth forecasts did not take into account a meltdown in Europe. She also warned of a stagflation risk, during which prices rise and growth falls, and the latest GDP figure has done little to allay fears of this.
Bishop said the issue with stagflation was that there were no real policy options. “You have to choose to either cut inflation or support growth.”
She said South Africa had not yet reached stagflation. “Technically the economy has grown in the last quarter and only when growth falls below zero and begins to contract can we call it stagflation.” Lings said such a phase was an awkward scenario for any central bank and there would be pressure to cut interest rates, although it was not likely to happen in the next three to six months.
Bishop said Investec did not expect a cut in interest rates in 2012, although a further weakening in the growth outlook might cause Investec to change its prediction to a 50 basis points easing. In 2009, interest rates were cut despite inflation being at 8%. “Given what happened historically, the Reserve Bank may decide to do that again,” she said.
But Lings said such a move would benefit the already thriving sectors and make little difference to the weaker industries. Cutting interest rates would not be sustainable or solve problems in the growth environment. South Africa’s growth could not be based on credit again, Lings said. Employment-driven growth was what was needed.
“The question is how do we create employment, and the answer is fixed investments. And we have to ask if our interest rates are restricting investment. The policy mix needs to stimulate initiatives in this regard.”stimulate initiatives in this regard.”