South Africa’s Unexpected Recession


 

For the first time since 2009, South Africa’s economy is back in recession. South Africa’s economy, Africa’s second biggest, shrank by 0.7 percent in the first quarter of this year. The recession has surprised analysts who had expected rebound to 0.9 percent growth after a 0.3 percent loss in the final three months of 2016.

The negative contributors to growth included trade, manufacturing and a decrease in government and household spending. Government agency Stats SA tweeted key points outlining the decline in growth; showing that the household final consumption expenditure was down by 2.3 percent and the 2017 nominal GDP is R17 billion less than Q4 of 2016. The farming and mining sectors showed growth, with the farming sector expanding at its fastest rate in a decade.

“This may suggest that high unemployment and stagnant wages are finally dragging down the long-resilient South African consumer sector,” Africa economist at Capital Economics John Ashbourne said.

Political instability in the country has caused concern amongst investors in the recent months. The country’s credit rating was recently given ‘junk’ status by two ratings agencies; S&P Global and Fitch. When a country is downgraded to ‘junk’ status, it is because that country is perceived as a defaulting risk because it is at an elevated risk of not being capable of paying back what it has borrowed. As a result, investors require higher compensation for their investment risk, expressed in a risk premium.

“The policy agenda is at increased risk of being overshadowed by political infighting. We believe the current political environment could result in the private sector delaying business investment decisions,” S&P Global Ratings analysts wrote.

President Jacob Zuma set off a new round of turmoil and economic uncertainty back in April when he ousted finance minister Pravin Gordhan and various other top ministers. Gordham was largely looked at as South Africa’s steady hand who guided the country’s economy whilst promoting its business interests. Gordham had served as finance minister from 2009 to 2014, and returned in December of 2015.

President Zuma and Gordham were divided on issues concerning the management of state-owned enterprises and the need for a new economic plan. The South African Rand had strengthened under Gordham’s watch, but fell once more once new broke of his firing.

The Treasury released a statement on Tuesday stating, “The Minister of Finance Malusi Gigaba will be seeking a meeting with business leaders soon to discuss ways of working together to achieve inclusive economic growth.

The political instability in the country continues as President Zuma has had to focus on remaining in power as an attempt to unseat him as state president was made. Unemployment rate within the country has risen to its highest since 2003, at 27 percent.

“It is the ANC that has led us to this point of economic collapse . . . it is a toxic combination of policy uncertainty and grand corruption which has led us to this point,” leader of the main opposition Democratic Alliance Mmusi Maimane said. The ANC, African National Congress, is South Africa’s governing political party.

Comments

comments