Johannesburg - South Africa sank into its first official recession in 17 years in the first quarter of 2009, with a massive 6.4% collapse in gross domestic product (GDP) fuelling hopes of another 100 basis points in interest rate cuts this week.

The plunge in GDP in the first quarter follows a fall of 1.8% in the fourth quarter of 2008. A recession is defined as two consecutive quarters of declining GDP. (All figures are quarter-on-quarter, seasonally adjusted and annualised growth rates, unless otherwise stated.)

Economists said though this was probably the worst it would get in SA, another quarter of negative real growth was quite possible. Some believed the Reserve Bank would have no choice but to cut interest rates aggressively this week. The bank has already sliced 350 basis points off interest rates as fighting recession has moved to its top priority, even as inflation remains sticky at high levels.

"This figure is a shock, although we knew that mining and manufacturing were in dire straits. This should button up the case for a further 100 basis-point interest rate cut this week, with more to come. It's a brutal picture," Nedbank economist Dennis Dykes said.

He pointed out that the sectors hardest hit - manufacturing and mining - were in synch with the global economy, and their recovery would depend on what happened internationally.

Sanlam Investment Management economist Arthur Kamp pointed out that, though mining and manufacturing were hardest hit with declines of 32.8% and 22.1% respectively, the recession was broad-based, with declines in output across a range of sectors. He believed that the first quarter would be the worst in the cycle.

Stanlib economist Kevin Lings said SA was in a "severe situation". He also noted the broad-based nature of the recession, as opposed to the fourth-quarter situation, which was dominated by manufacturing. He believed forecasters had underestimated the severity of the recession because they hadn't realised how broad-based it would be.

Lings said the terrible mining performance showed SA's exports had been particularly hard hit by the global recession. This had spilled over into domestic sectors, such as finance, where banking activity had slowed significantly. Lings expected a decline in GDP of 1.5% to 2% for the full year.

- Fin24.com