SA’s economy dips into recession dashing economists hopes

The South African economy is in a recession for the first time since 2009, Statistics SA announced on Tuesday.

Although economists had hoped for an improved second quarter, which would have meant that the nation would have escaped a technical recession, the second quarter of 2018 shrank by 0.7% quarter-on-quarter. 

The shrinkage follows a 2.6% contraction in the first quarter of the year, Stats SA announced on Tuesday.

According to Stats SA, a “fall-off” in activity in agriculture, transport, trade, manufacturing and government sectors resulted in the contraction.

FNB economist Jason Muscat says there are “few shining lights” with broad weaknesses in the economy, and economic research consultancy company Capital Economics noted in a press statement that the economy should recover over the next year, but it believes that “a sharp rebound is unlikely”.

The continued drought in the Western Cape and a severe hailstorm in Mpumalanga which led to extensive crop damage contributed to the slowdown of agricultural production to 29.2% in the second quarter following 33.6% fall in the first quarter.

But mining, construction, electricity, finance and personal services experienced growth in the second quarter. However, Muscat says this growth is off a weak base.

According to Stats SA, the mining sector’s growth of 4.9% was led by an increase in the production of platinum group metals, copper and nickel.

Net exports also contributed to positive growth with its increase of 13.7%, according to Stats SA, the growth was attributed to an increase in trade in precious metals, mineral and vegetable products.

South Africa also increased its import of goods and services by 3.1%

Household expenditure has also decreased by 1.3% Stats SA reported as consumers tightened their spending on transport, clothing and food which decreased by 6.1%, 6.8% and 2.8% respectively.

READ MORE: Fuel, utilities gobble up spare cash

“Everything looks very weak,” Muscat said, adding that the growth forecast for the third will come under pressure.

Last week Muscat told the Mail & Guardian that the retail sector would remain under pressure because he suspects a continued weak rand and elevated oil price will adversely affect disposable income (again), and water and electricity prices will be increased too.

“Given our fiscal deficit and the need to close it, it is almost certain that taxes will have to be increased at next year’s budget review, which again eats into disposable income,” says Muscat.

“Even if the fiscal adjustment were to come from the expenditure side, it means that there is less investment and job creation from government, which will hold back better consumption numbers. Also, the higher VAT rate is not going to go away.”

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