South Africa's economy contracts, risk of recession grows

By Mfuneko Toyana
A man carries a box with spinach as he walks past a board displaying food prices outside a grocery shop in Johannesburg July 23, 2015. REUTERS/Siphiwe Sibeko

By Mfuneko Toyana

PRETORIA (Reuters) - South Africa's economy shrank for the first time in more than a year during the second quarter of 2015, raising the risk that labour disputes and slowing Chinese demand for commodities could push it towards recession.

The economic strain will inhibit the central bank from raising rates further to protect a weak currency and target inflation, while also torpedoing government efforts to keep deficits in check and protect its credit ratings.

Gross domestic product in Africa's most industrialised economy shrank by 1.3 percent in the second quarter after growing 1.3 percent in the first three months of the year, Statistics South Africa said on Tuesday.

This was the first quarter-on-quarter decline in Africa's most advanced economy since the first three months of 2014, and was far below the most pessimistic forecast in a Reuters survey of economists.

"There is a real risk that South Africa experiences an outright economic recession over the coming quarters," said Kevin Lings, chief economist at Stanlib, blaming labour disruptions in mining and manufacturing for slowing growth.

Manufacturing output, which accounts for about 13 percent of GDP, tumbled 6.3 percent during the quarter, while mining was down 6.8 percent.

Finance Minister Nhlanhla Nene will struggle to balance flagging growth while keeping a cap on spending when revenues are increasingly hard to come by, analysts said.

The Treasury forecast a budget shortfall of 4.1 percent of GDP for 2014/15 and the trade deficit is likely to widen as the China's economy brakes.

The rand has already fallen nearly 15 percent against the dollar this year, undermined by South Africa's current account deficit and sluggish growth.

"We've got no room for manoeuvre," Nicky Weimar, senior economist at Nedbank said, adding that ratings agencies would be watching how the central bank and Treasury respond.

"It does not have to be the end of world. It will depend on how successful we are on containing government spending."

Government spending accounts for over 15 percent of GDP and has been the main instrument used by the ruling African National Congress (ANC) to lift millions out of poverty and try to reduce an unemployment rate of 25 percent.

Standard & Poor's, which has South Africa just one place above sub-investment grade, said in June that limiting fiscal risks in the next three years was key.