Johannesburg - Tuesday's weak second quarter GDP figure validated the SA Reserve Bank's decision to cut interest rates further in August, Nedbank Group's economic unit said.
Earlier Statistics SA said that seasonally adjusted real GDP at market prices for the second quarter of this year decreased by an annualised rate of three percent compared to the first quarter of 2009 when it declined 6.4%.
"Even though some economic indicators suggest that the worst of the slide is probably behind us and that the local economy may even emerge gradually from 'official recession' later this year, the recovery, both globally and locally, is expected to be slow and sluggish, while excess capacity and weak demand will reinforce the downward trend in inflation in the months ahead," Nedbank said.
As a result, it added that it expected another 50 basis point cut in interest rates in October, bringing the prime rate down to 10% by year end.
According to Nedbank, economic conditions would remain weak for the rest of the year, but some levelling out was expected in the third quarter followed by a slightly better performance in the final quarter.
"Much still depends on the state of the global economy," Nedbank said, adding that global activity had improved slightly in the second quarter.
"China's economy picked up pace, boosted mainly by a massive fiscal stimulus package and aggressive credit growth.
"The rates of decline in US and UK GDP slowed down to around one percent, while Germany, France and Japan even managed to produce positive, albeit modest, growth rates."
Overall, the global economy appeared to be gradually levelling out, helped mainly by highly stimulatory fiscal and monetary policies as well as aggressive stockpiling of bulk commodities by China.
However, Nedbank said it still expected only a slow and weak recovery off a very low base over the next six to 12 months as the short-term effects of the various fiscal stimulus packages started to fade and the anticipated build up in global inventories proved disappointing.
"The global economy will instead be hampered by altered credit markets, a massive debt overhang and higher unemployment, resulting in subdued and sluggish growth in the second half of 2009 and for much of 2010," Nedbank noted.
Hope for mining
Volatile and weak performance was therefore still expected from the main exporters in the mining and manufacturing sectors.
"Mining should fare better than manufacturing, supported by stronger Chinese demand and some degree of restocking in some industrialised countries," Nedbank added.
Higher unemployment, falling income and fragile confidence would continue to undermine household demand, keeping spending in check and containing credit demand.
"As a result, the retail trade, hotels, restaurants, finance, insurance and real estate industries will all be subdued, but some consolidation is likely in the third quarter before a modest recovery starts in the fourth quarter."
Nedbank said lower interest rates and heavily discounted pricing might revive demand for durable goods in the months ahead, but a broad recovery was only likely once job losses and household finances improve.
"In contrast, construction and general government activity is likely to remain positive, but the rate of growth is expected to slow further in the months ahead.
"This is partly as some projects related to the hosting of the Fifa World Cup near completion and the flow of new projects from the private sector dries up, but also as pressure on government finances starts to mount in face of falling tax revenue."
Nedbank said that overall, South Africa's GDP was still expected to contract by about 2% in 2009 as whole, before growing by around 1.7% in 2010.
- Sapa