South Africa sees surprise sharp downturn

South Africa’s economy contracted by 1.2 percent at the start of the year in a surprisingly sharp downturn for Africa’s most industrialised nation, official statistics showed Wednesday.

The country has been struggling with record unemployment, drought and political scandals, but most economists had still forecast only a marginal contraction.

“GDP growth rate was -1.2 percent in the first quarter of 2016,” Statistics South Africa said in a statement.

“The main contributors to the negative GDP growth rate were the mining and quarrying industry and the transport, storage and communication industry.”

GDP dipped by 0.2 percent on a year-on-year basis, as South Africa teeters on the brink of its first recession since 2009.

“This is weakest growth recorded since the second quarter of 2015 and it does increase the likelihood that a recession will be recorded this year,” Laura Campbell, economist at South African think tank Econometrix, told AFP.

The central bank and the International Monetary Fund (IMF) forecast GDP growth in 2016 at a meagre 0.6 percent, while Nedbank, one of the country’s four leading banks, expects it to be only 0.2 percent.

The dismal growth data have been accompanied by high inflation, forcing tough monetary policy choices on the central bank, which in March raised its key rate to 7.0 percent — a six-year high — to tackle rising consumer prices.

The bank has targeted inflation to stay below the 6.0 percent ceiling, but it is currently at 6.2 percent.

Inflationary pressures have continued to build with the depreciation of the rand and the worst drought in a century pushing up food prices.

– Junk threat –
“The economic outlook remains relatively bleak,” Nedbank said in a note.

“Softer global demand, the global commodity price slump, rising domestic production costs and limited economic infrastructure are likely to continue to weigh on mining and manufacturing.

“Overall, the economy will struggle to grow in 2016 but it is expected to expand by 1 percent in 2017.”

South Africa last week avoided a credit rating downgrade to junk status by S&P Global-Ratings, and Fitch Ratings on Wednesday also kept its rating at the lowest investment-grade level.

But a downgrade to junk status could still happen later this year.

As the country suffers a major decline in investor confidence, a sub-investment grade rating would likely prompt selling by funds that do not hold junk-rated securities.

Political upheavals, particularly President Jacob Zuma’s sudden sacking of finance minister Nhlanhla Nene in December, have seen the rand fall sharply against the dollar.

The president’s tense relations with current Finance Minister Pravin Gordhan, who is seen as trying to tackle corruption and wasteful expenditure, have also shaken investors.

Mining and quarrying — which contribute around eight percent to GPD — fell by 18.1 percent in the last quarter, due to lower production of platinum and iron ore.

South Africa, which expanded by an average 5.0 percent between 2004 and 2007, has been hit by weak international commodity prices and the economic slowdown in China.

The agriculture and fishing industry declined 6.5 percent in the first quarter of 2016 due to low production induced by the drought which has hit many of southern African countries.

State prosecutors are appealing against an April court ruling that President Zuma should face almost 800 corruption charges dating back to before he became president in 2009.