South Africa’s latest economic data has once again disappointed, with Statistics South Africa reporting that the country’s economy contracted by -1.4% during the fourth quarter of 2019.
These results meant that South Africa also slipped into its third recession since 1994. A country enters a technical recession if it experiences two consecutive quarters of economic contraction; South Africa’s economy contracted by -0.8% during the third quarter of 2019.
For the full year of 2019, the economy only grew by 0.2% – down from 2018’s 0.8%, which was also down from 2017’s 1.4%.
Analysts ascribed much of the fourth quarter’s contraction to December’s load shedding, the worst since the scheme’s introduction in 2007/08, and low levels of investor confidence.
“Although we’ve grown accustomed to bad news, seeing the actual figures is still upsetting,” said Efficient Group economist, Francois Stofberg.
“To give some more context about the severity of these numbers – only three of the ten aggregate industries in South Africa grew during 4Q19: the financial (2.7%), mining (1.8%) and personal service (0.7%), industries.”
Stofberg noted that the industries which contracted the most were the agricultural (-7.6%), transport and communications (-7.2%) and construction (-5.9%) industries.
“In fact, all three of these industries contracted during each of the four quarters of 2019,” he said.
“The agricultural and construction industries have been contracting at such a rapid pace during the last couple of years that these industries are now smaller than they were in 2014.”
Growth forecast slashed
These concerns were echoed by banking group BNP Paribas which has cut its GDP growth outlook for South Africa to a contraction of 0.2% in 2020, on the back of continued load shedding and the global impact of the Covid-19 coronavirus.
The group said it already had a sub-consensus view on South Africa before the cut at 0.4%, with most GDP growth projections sitting between 0.5% and 0.9% for the year.
However, it said that “South Africa’s growth woes look set to worsen in the next few quarters”.
Prospects for 2021 have also been cut, with next year’s recovery now seen as 1.0% growth rather than the prior 1.3%, the bank said.
Unlike other countries, which are pushing through stimulus packages to counter the effects of the global market crash due to the coronavirus, BNP Paribas said South Africa simply does not have the fiscal room to do the same.
However, the group said there is some room for the South African Reserve Bank (SARB) to make some rate cuts.
This was echoed by Stofberg who forecast that the SARB will cut interest rates by 0.50% in 2020.
A Reuters poll of 12 economists predicts that the central bank will cut rates by 25 basis points next week to lift the economy out of recession, easing less aggressively than other global central banks trying to mitigate damage from the coronavirus outbreak.
“The SARB has nothing to lose: inflation is slowing, the economy is back in recession, it is amongst the two most vulnerable EMEA economies to coronavirus, and the Fed is giving it some leeway,” said Francesca Beausang, senior economist at Continuum Economics.
The poll suggested inflation would average 4.2% this year, 0.2 percentage points lower than in last month’s survey and compared with the last reported rate of 4.5%.
“The SARB will have to cut its inflation and growth forecasts notably at this meeting and with the oil price at the mid-30s ($ per barrel) and global interest rates declining, they have room to add stimulus,” said Elize Kruger, an independent economist.