The Slowdown Continues

Growth slowed again in H1 2013 and the outlook for H2 is still morose despite an accommodating monetary policy. Rating downgrades, balance of payments financing constraints and an inflation rate close to the upper limit of the central bank’s target range limit South Africa’s fiscal and monetary manoeuvring room. Under this environment, there is growing aversion to South African risk, which is only exacerbated by the re-emergence of labour unrest in the mining sector. Risks of balance of payments pressures have increased.

Barely 2% growth in 2013
In Q1 2013, GDP growth slipped below an annualised quarterly rate of 1%, the worst performance since 2009. Despite a positive carry-over effect at year-end 2012, GDP growth is unlikely to exceed 2% this year.

In Q1 2013, half of the ten major sector components of GDP either slowed (administrative services, home care services) or contracted (agriculture, manufacturing production and energy). Only four continued to grow: construction, retailing, transportcommunications and financial services. The rebound in mining must be kept in perspective after a 2-year crisis in which production rose in only one quarter. Against a backdrop of eroding competitiveness (higher wage and extraction costs), mining production began to decline again in March and April, down 3.7% and 0.4% y/y, respectively. Moreover, with gold prices down -20% between October 2012 and June 2013, and the re-emergence of labour unrest with the approach of sector wage talks in mid-2013, investments could be postponed, straining the mining industry in H2.

The depreciation of the rand (see below) marginally improves the price competitiveness of South African products, but raises the cost of imports, which are already boosted by the 2013 National Development Plan, a public infrastructure development programme. The eurozone recession and slowdowns in India and China are in the process of eliminating any hopes of a recovery in exports, which stagnated in 2012. Net imports are thus likely to place another heavy burden on growth in 2013 (the negative contribution to growth has averaged 1.6 points of GDP each year since 2010).

Domestic demand does not look any brighter either. The government’s gradual fiscal consolidation plans are limiting public spending. The government intends to reduce the deficit from 5.3% of GDP in fiscal 20121 to 4.6% in 2013 and 3.9% in 2014. These targets are unlikely to be met (see Summary) because they are based on overly optimistic growth assumptions, even after the downward revisions of February 2013 (2.7% in 2013 and 3.5% in 2014). Yet after taking into consideration balance of payments financing restrictions, the government will have to limit budget overruns by rationing its capital spending needs.

BY Jean-Loïc GUIEZE

To Read the Entire Report Please Click on the pdf File Below.