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14 Oct 2011BUSINESS CONDITIONS: Economic Activity Slows As Strikes Compound Output Woes
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Growth and economic activity in South Africa have slowed dramatically in past months, and it is now expected that the full year growth for 2011 will only be around 3%. Forecasts for 2012 do not look much better, with growth likely to be around 3.5%, says BoE Private Clients Chief Investment Officer Daryll Owen.
âManufacturing output dropped 6% month-on-month in July. In addition, strikes presented a major drag on output. However, even as the strikers returned to work, the purchasing managers index only recovered modestly to 46.7 in August, up from 44.2 in July,â Owen says.
He says a continued slowdown in growth can be expected.
âSo far, mining data also points to a contraction, leading one to anticipate a further slowdown in growth momentum to around 1% quarter-on-quarter in the third quarter, down from 1.3% in the second. The projection for markedly slower economic growth poses risks to the fiscal outlook with an expected widening in the deficit to around 5% of GDP this year and for 2012.â
Economic Activity Lower Than First Expected
Owen says that, when the budget for the 2011/2012 financial year was tabled in February, the Treasury anticipated a pick-up in growth to 4.1% in 2012, up from an estimated 3.4% this year.
âThe resulting recovery in tax receipts would have enabled the gradual reduction in the fiscal deficit. However the sharp slowdown in economic growth from around mid-year, combined with the materially weaker global outlook, has resulted in us having to forecast a lower GDP growth trend over the next two years.â
When the Monetary Policy Committee recently decided to keep rates unchanged at 5.5%, they described inflation risks as delicately balanced, and risks emanating from the currency as moderate but rising.
âThere is still a chance that rates may be cut,â Owen says, âbut a lot would depend on what the rand does.â
âWe remain of the view that continued accommodative monetary policy is exactly what is needed to ensure a sustained recovery in South Africa.â
Slow Economic Activity Could Turn into Dangerous Recession
Mike Schüssler, economist and compiler of the monthly Provincial Barometer which analyses economic activity in the Western and Eastern Cape, Gauteng, KwaZulu-Natal and the Free State, says although it was too soon to speak of another recession, South Africa was currently more defenceless than three years ago when the last recession struck.
âThe provincial barometer levels are the lowest since December and clearly show that South Africa is currently experiencing a contraction, aggravated by rising prices and inflationary pressure. Compounding the situation is the international uncertainty that is suppressing demand for South Africaâs biggest export product, its resources.
âWe now have a situation where both the value of the rand and resource prices are on the decline, meaning that two of the buffers which protected us from the effects of the previous recession have gone.â
Schüssler says that the decline in manufacturing had a direct effect on unemployment.
âStatistics SAâs quarterly employment figures show that hiring in the formal sector contracted by about 8000 posts in the past quarter. In the Eastern Cape, where the economic contraction has persisted for five months, the threat of a second recession is the greatest,â Schüssler says.
âItâs the poorest parts of the country that are most affected by negative factors such as rising inflation and unemployment, and there is cause for concern about their ability to absorb future economic activity shocks.â
Business News Sector Tags: Business| Economy|
