Growth risks mount even as SA dodges a recession
South Africa avoiding its second recession in five years is doing little to ease investor concern that economic growth prospects are dimming.
Investors are paying 1.1 percentage points more to insure the country’s debt against non-payment for five years using credit default swaps than for similarly rated Mexico, according to data compiled by Bloomberg. South Africa’s default swaps are the third-highest among 25 emerging and major markets monitored by Bloomberg.
While a government report on Tuesday will probably show Africa’s second-largest economy rebounded from a contraction in the first quarter, weak retail sales and manufacturing output indicate there is little momentum to spur growth. The slowdown prompted Standard & Poor’s to downgrade South Africa’s credit rating and warn of further cuts.
“Confidence among corporates is very low and it could actually sink even lower,” Gina Schoeman, an economist at Citigroup Inc. in Johannesburg, said by phone on August 22. “Private-sector fixed investment is something that’s simply not going to rebound.”
Gross domestic product (GDP) declined an annualised 0.6% in the three months through March, the first drop since a 2009 recession, after a five-month strike at the world’s biggest platinum producers caused mining output to plunge 25%. GDP probably expanded 0.9% in the second quarter, according to the median estimate of 23 economists surveyed by Bloomberg.
The mining strike was followed by a four-week stoppage by about 220 000 workers in the metals and engineering industry, forcing carmakers such as General Motors Co. to shut plants. That’s undermined business confidence, which fell in July to the lowest in almost 11 years, at the same time that power utility Eskom Holdings SOC Ltd. has been forced to implement managed blackouts this year, restricting economic expansion.
“We need an infrastructure drive, we need better functioning government and we need a better labour-relations environment,” Rian le Roux, chief economist of Old Mutual Investment Group, which has about $53-billion under management, said by phone from Cape Town on August 21. :The consumer is under pressure. I can’t see that easing up dramatically.”
The Reserve Bank, which has raised interest rates twice this year, cut its 2014 growth forecast to 1.7%, which would be the slowest pace in five years.
Consumer spending, which makes up 60% of GDP, is barely growing. Retail sales were stagnant in June, its worst performance in four and a half years, according to data from the statistics office. Manufacturing rose 0.5% in the same month from a year earlier.
“The outlook for both domestic demand, both in investment and the consumer, doesn’t look like it’s going to pick up,” Arthur Kamp, chief economist at Sanlam Investment Management, said by phone from Cape Town on August 21. “The global economy has got to grow before we can pick up meaningful momentum.”
With inflation remaining above the central bank’s 3% to 6% target band, policy makers have limited room to ease monetary policy to support growth. The Reserve Bank has raised its benchmark repurchase rate by 75 basis points this year to 5.75%, concerned that a weaker rand and rising wage demands will keep inflation outside the target for an extended period.
The rand has slumped 3.7% against the dollar in the past three months and gained less than 0.1% to 10.6895 per dollar at 10.34am in Johannesburg. The yield on the government’s benchmark rand bonds due December 2026 was little changed at 8.21%.
“We are stuck in a low-growth scenario,” Adenaan Hardien, chief economist at Cadiz Asset Management, which manages the equivalent of $3.2-billion, said by phone from Cape Town on August 22. The ability of the economy to generate growth “is severely constrained, even in the absence of strike activity.” – Bloomberg