SA recession will be milder

Johannesburg - South Africa looks set to contract by around 1% in 2009, but its recession will be milder than downturns in most other countries, according to Moody's Economy.com.

"Almost a quarter of the labour force is already unemployed, and joblessness is expected to rise through most of 2009 amid increasing layoffs in the country's important manufacturing and mining industries," said the global economists in a note on Friday.

They add that retailers and service providers are also likely to reduce hiring in response to slowing domestic consumption.

"Rising unemployment and softer wage growth will put South Africa's highly indebted households under extreme pressure."

However, they say that the silver lining is that the recession will be milder than downturns in most other countries. In addition, the deterioration in South Africa's public finances this year and next will also be much less severe than in most other G20 countries.

Looser monetary policy and a moderate recovery in external demand are expected to help put the economy back on track next year. However, growth will remain well below potential until early next decade, muting job creation.

"Nevertheless, the government's commitment to investing in the infrastructure needed for growth and development will provide some relief. Massive infrastructure projects, including large-scale public housing, will support demand for construction workers," said the economists.

"We expect the shrinking economy and cooling inflation to prompt the South African Reserve Bank to cut interest rates by another full percentage point next week," they concluded.

South Africa is set to formally enter recession territory for the first time in 17 years when first quarter data is announced on Tuesday next week. I-Net Bridge's Econometer expects a print of -3.9% quarter-on-quarter from ?1.8% in the fourth quarter of last year.

Rating agencies are currently keeping a close watch on South Africa after the election and changes to the economic policy-making units. Some meetings are scheduled for next week that may cast more light on the way rating agencies will go, but no decisions have been made by the major rating agencies yet. It also remains very unclear exactly where the centre of economic policy lies, although the Treasury and central bank have confirmed their powers have not diminished or been tinkered with.

- I-Net Bridge