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Agriculture, mining weighs economy down

Cape Town - The combination of drought and the continuing slow-down in mining have created a strong drag on the economy, AlphaWealth Fund Manager Keith McLachlan told Fin24.

Statistics SA announced disappointing GDP growth figures for the first quarter of 2016 with the economy contracting by –1.2%.

The main culprits were agriculture (-6.5%), mining (-18.1%) and the transport, storage and communications sector (-2.7%).

McLachlan said agriculture and mining, as well as cost-push inflationary pressures, have further hurt consumer spending and resulted in our economy essentially contracting in the first quarter.

He some of these variables are once-off such as the drought, while others are structural like labour- and cost-related friction in the mining sector.

"Combined, it does point to a tough 2016, but in the absence of any major external or internal shocks, we may be near the bottom, implying some upside in the economy from here."

FNB economist Jason Muscat said the severe drought that has impacted farmers, as well as waning Chinese demand and weak commodity prices have seen the primary sector become a significant drag on growth

"We expect a rebound from agriculture after five consecutive quarters of contraction, but the mining outlook remains poor and the potential for labour unrest adds downside risk to even our bearish outlook," he said in a statement.

Muscat said the manufacturing sector expanded a meagre +0.6% and there remains little evidence the weak exchange rate is proving a material tailwind for exporters.

The finance, real-estate and business services sector (+1.9%) as well as trade (1.3%) carried what little growth there was, but given higher interest rates and elevated inflation, however even these two sectors are likely to slow in the coming quarters, cautioned Muscat.

The newly revised numbers which account for both income and expenditure show that household consumption collapsed in the first quarter by –1.3% while gross fixed capital formation fell by –6.0%.

"Despite both S&P and Fitch having upheld their sovereign credit ratings, the growth trajectory is very worrisome and, without structural reform, could well trigger a downgrade at the end of the year."

Stats SA also showed that gross domestic expenditure contracted by seasonally adjusted and annualised 0.8 % in the first quarter of 2016 following a 2.9 % rise in the final quarter of last year.

"The contraction was driven by weak household consumption expenditure, fixed capital formation and exports, which offset a rise in consumption expenditure by general government," Nedbank said in a statement.

The bank expected the country's economic outlook to remain relatively bleak.

"On the output side, agriculture is expected to remain depressed, given the lingering impact of the drought on many farming regions. Softer global demand, the global commodity price slump, rising domestic production costs and limited economic infrastructure are likely to continue to weigh on mining and manufacturing, offsetting any likely competitive boost from a weaker rand.

"Consequently, restructuring will probably continue in these sectors, resulting in cutbacks to capital expenditure and jobs among private firms. The slower pace of household spending is also expected to continue, given the stagnant job market, softer income growth and rising cost pressures ranging from surging food inflation and higher fuel prices to rising debt service costs."

Nedbank said consumption expenditure by general government will be boosted by election-related spending, but growth will be contained given the need to minimise wasteful expenditure and exercise fiscal discipline against the backdrop of limited revenue and rising government debt.

"On balance, the more cautious and conservative attitude among domestic consumers is expected to outweigh any boost from the recovering tourism industry, containing growth in the services industries. Overall, the economy will struggle to grow in 2016 but it is expected to expand by 1 % in 2017," it said.

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