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SA to struggle with low growth going forward

Oct 13 2015 09:00
Lameez Omarjee
The Sarb has revised South Africa's economic growt

The Sarb has revised South Africa's economic growth rate to a lower 1.5%.

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South Africa’s negative growth of 1.3% in the second quarter of the year was fairly broad-based, with contractions across different industries. This was coupled with reduced consumer demand, which drove down GDP generated from the trade sector. But it is doubtful that a recession is likely.

A recession requires two successive quarters of negative global growth. The slowdown would have to be the magnitude of that experienced during the global financial crisis, says Peter Worthington, senior macro economist at Corporate and Investment Banking, Barclays Africa.

Following the public sector wage deal, economic growth, although not very robust, is expected in the third quarter. The South African Reserve Bank (Sarb) expects the potential growth rate to be at 1.5% in 2015 and 1.6% in 2016.

There are three downside risks to the expected growth:

1.      The mining and precious metals industry is going to go through a contraction

Downsizing is expected in the industry. “You can’t get away from economic reality,” says Worthington. Additionally the VW debacle, resulting from the “cheat technology” installed in diesel cars to reflect lower emissions is bad news for the platinum sector.

There is likely to be an aversion to diesel cars, which use platinum in their catalytic converters, by consumers and regulators, which will consider them less favourably.

The consequences are that platinum demand could be weakened, which was reflected in the drop in the platinum price to $900 (R11 970) an ounce. At $900 an ounce as a threshold, about two-thirds of SA’s platinum industry is not profitable, says Worthington.

But an improvement in productivity is possible as mining houses continue to sell their assets, as seen when Anglo American sold to Sibanye Gold. “The output will be there, but job losses will come through in that sector.”

2.      Local government elections in 2016

These elections may be the most important SA has faced since the 1994 transition, says Worthington. The stakes are high, as the ANC seems to be losing a lot of support in metropolitan areas. “They may have to choose a coalition partner and govern in a coalition,” he says.

The rousing messages by opposing parties like the EFF, which resonate with the disaffected population, also pose the risk of instability during the campaigning season.

3.      El Niño brewing in the Pacific

The magnitude of the impact of El Niño on SA is unknown. It is yet to be determined if it will manifest as drought or floods. This uncertainty will affect farmers’ decisions as their crops will be at risk due to adverse weather.

Opportunities for growth lie in SA’s trade with neighbouring countries, which are growing strongly. Africa remains an important growth area for SA, which government and the department of trade and industry should prioritise, says Worthington.

Once SA addresses its infrastructure constraints, like electricity, roads and railways, another area of growth could present itself.

The low oil prices are a “gift from the heavens at an opportune time”, says Worthington. South African consumers cannot see the benefits of the low oil prices, because of the petrol taxes, which offset them, but it is beneficial to Eskom, which imports diesel.

Additionally the low oil prices are good for the global growth in economies SA exports to. The country does best when the global economy is growing strongly, explains Worthington.

economic growth  |  agriculture  |  recession  |  mining