IHS Global Insight Perspective | |
Significance | A deepening global recession and tight monetary conditions domestically are straining economic activity. |
Implications | Significant job losses across all sectors may prolong the recessionary conditions. |
Outlook | Future growth will hinge critically on the monetary stance. |
All Sectors Down
According to figures released by Statistics SA, fourth-quarter GDP growth contracted more than expected to 1.8% in the fourth quarter of 2008 on a quarter-on-quarter (q/q) seasonally adjusted and annualised basis (all quarterly data is s.a.a. growth rates unless otherwise specified) from 0.2% q/q growth in the third quarter of 2008. This brings the annual rate to 1.3% year-on-year (y/y) compared to 3.1% y/y in the previous quarter. For the year as a whole, South Africa registered growth of 3.1% compared to 5.1% in 2007.
The seasonally adjusted real value added at basic prices for all industries decreased by an annualised rate of -1.7% q/q during the fourth quarter of 2008, compared to growth of 0.3% q/q in the third quarter of 2008. Non-agricultural industries contracted by -2.2% q/q compared to a contraction of -0.5% q/q in the third quarter of 2008. The non-agricultural sector of the economy thus technically slipped into a recession following two quarters of negative growth.
- Agriculture sank back marginally from its high base in the third quarter, which was to be expected as the harvesting season falls mainly in the third quarter. However, the seasonally adjusted real value added by the agriculture, forestry and fishing industry still increased by a stellar annualised rate of 16.7% during the fourth quarter of 2008, compared to 31.6% in the third quarter of 2008. The sector still contributed 0.5 percentage points to growth. The outlook stays positive on the back of favourable weather conditions expected in 2009, but the agricultural sector is always subject to a unique set of problems, including high input costs (the lagged effect of high energy prices (oil) still leads to elevated input costs) and falling food prices, which puts margins under pressure.
- Having registered a significant decline in the third quarter, output from the mining sector improved somewhat from the low base and showed growth of 0.4% compared to the 8.8% contraction in the previous quarter. Although the mining sector thus statistically improved in the fourth quarter, IHS Global Insight still expects mining job losses to continue as sales slow on the back of falling commodity prices and delayed investment spending. However, the gold price is holding up well and should offer some support to this sector in 2009.
- The latest monthly readings from manufacturing production and the purchasing manager’s index (PMI) point to a significant slowdown in this sector in the fourth quarter of 2008 (see South Africa: 11 February 2009: South African Manufacturing Sector Under Severe Pressure). This manifested in a -21.8% contraction following a -9.4% contraction in the third quarter of 2008. This sector contributes around 16% to overall GDP and thus subtracted 3.5 percentage points from growth. The deepening global recession and slowing domestic demand exerted significant downside pressures on both prices and sales volumes, and this situation is expected to continue for most of 2009.
- Electricity, gas and water production reflected subdued demand elsewhere in the economy and decreased by 2.7% in the fourth quarter, compared to growth of 3% in the previous quarter.
- The construction sector is still benefiting from infrastructure spending, but is starting to feel the strain of the slowdown in building activity in the residential sector. The seasonally adjusted real value added by the construction industry still increased at an annualised rate of 10.8% during the fourth quarter of 2008, but was significantly slower than the 15% growth recorded in the third quarter. Subdued business and consumer confidence will impact specifically on private-sector activity, holding back the performance of this sector in 2009.
- Registering negative growth for the third consecutive quarter, the wholesale and retail trade, and hotels and restaurants industry fared somewhat better in the fourth quarter and decreased at an annualised rate of 0.2% during the fourth quarter of 2008, compared to a contraction of -6.9% the third quarter of 2008. Better December retail sales supported this improved performance, but this is expected to be short-lived (see South Africa: 19 February 2009: Retail Rebound is Short-Lived in South Africa).
- The transport and communication sector reflected lower trade volumes and slowed to 1.8% from 4.5% previously.
- The finance sector reflects the activity in the rest of the economy and therefore slowed somewhat to 3% in the fourth quarter from 32% previously. The tight financial environment is expected to continue to impact on this sector.
Outlook and Implications
Given the severity of the contraction, especially that in the manufacturing sector, the expectation of a special meeting of the South African Reserve Bank's Monetary Policy Committee to consider more aggressive interest rate cuts has risen significantly. Employment trends are expected to reflect the slowing patterns in all sectors of the economy, leading to significant job losses. This will negatively impact on disposable incomes, leading to less spending and demand. IHS Global Insight expects growth to stay subdued over the next two quarters, with yet another negative figure in the first quarter of 2009, thus putting the economy technically in recession. Stimulatory factors include a significant easing in fuel prices, the weaker currency that will benefit manufacturing, and the government’s supportive fiscal stance. The monetary policy stance will play a leading role in whether the economy picks up towards year-end or not. An aggressively easing monetary stance will boost confidence over the short term while helping economic recovery over the medium term. Given the lacklustre growth outlook and the risk to employment, the monetary authorities may decide to cut interest rates at a special MPC meeting before the scheduled meeting in April 2009. A slowing trend in inflation will support this move.