South Africa dips back into recession and risks another downgrade

Poor GDP figures have revealed that South Africa has entered a technical recession following two consecutive quarters of negative economic growth, heightening the country’s risk of suffering yet another credit downgrade in the second half of the year, according to leading economists. Maarten Ackerman, Citadel chief economist and advisory partner, warned that the numbers show the economy shrank by 0.7% in the second quarter of this year (quarter on quarter, annualised), while the first quarter’s figures were revised down even further to -2.6% from -2.2%. This brings the total year-on-year growth to an anaemic 0.4%, well below the population growth rate of 1.7%. The rand immediately plunged from ZAR14.90/$ to ZAR15.20/$ in the wake of the data release, while the ten-year bond yield rose nearly 15 basis points, trading above 9%. Pointing to these figures, Mr Ackerman said that, while the poor figures were not unexpected, market reactions to the news demonstrates the belief that the risk of a credit rating downgrade is back on the table. He said: “The 1.5% growth estimated by [the] National Treasury in February’s Budget speech is currently at severe risk and will likely need to be revised downwards, creating a very difficult environment next month for the delivery of the medium-term Budget policy statement.” The biggest detractor from the GDP figures was the agricultural sector, which declined a further -29.2% following its previous decline of -24% in the first quarter. He pointed out: “This wasn’t unexpected, however, as agriculture saw a huge boost last year coming off a low base from the drought, to increase by around 17%. We knew this momentum could not last forever. However, with time this base effect will fall away and the agricultural industry will start to contribute positively again.” He noted that if the drag from the agricultural industry were excluded from the figures, weak contributions from other industries would still see GDP growth at a mere 0.1%. “Despite this, it is somewhat positive to see that the mining, construction, electricity and financial industries all contributed positively to the economy over the past quarter, as these industries form the growth engines of the economy and hold the most potential for job creation,” he concluded. Mr Ackerman stressed, however, that while major challenges lie ahead for the South African Government and President Ramaphosa, it would be wrong to lay the blame for poor economic performance on him, as it remains a legacy of ten years of economic mismanagement. “President Ramaphosa’s administration has been doing the right things and making the appropriate adjustments, but it will take time to be felt in the economy,” he said. “We do need clarity on land redistribution and mining policy before we will be able to really attract investments, but I believe that the first two quarters of this year are more of a spillover of ten years of corruption and mismanagement than anything that the new government should take accountability for,” he ended.

South Africa dips back into recession and risks another downgrade

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