Just as South Africa avoids junk status, recession looms

South Africa’s economic outlook is foggy, if not grim.
South Africa’s economic outlook is foggy, if not grim.
Image: Reuters/Mike Hutchings
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South Africa’s economy contracted by 1.2% in the first quarter of 2016, the country’s statistics agency announced (PDF) Wednesday (June 8), sparking fears of an impending recession. The number was worse than expected, as analysts predicted the economy would grow by 0.1%—not shrink.

Mining, historically one of South Africa’s main sources of income, was the worst performer. The industry contracted by 18.1%. Decreased iron ore and platinum production has hurt an already struggling industry, according to Statistics South Africa. The transportation, storage and communication industries also shrank, by 2.7%.

Weakened by an ongoing drought across southern Africa, the agriculture sector has declined for five consecutive quarters. The only relatively strong performer was financial services and real estate.

“While the GDP has gone down by 1.2%, if we exclude mining which was quite a big drop in this round, growth would have been 0.5%,” Michael Manamela, Chief Director of National Accounts at the statistics agency, told reporters.

South Africa’s exports fell by 7.1%, mainly due to lower mineral and precious metal outputs and transport equipment. Imports also fell by 7.1% because of lower mineral and chemical products and imports of services.

South Africa’s gloomy economic outlook got a reprieve when ratings agencies decided to maintain the country’s current debt rating and outlook, avoiding downgrading the country to junk status. Ratings agency Fitch affirmed South Africa’s BBB- status with a stable outlook, but warned that the dismissal of two finance ministers in one week and tension between the current finance minister and other state groups was of concern.

Despite recession fears, Standard and Poor’s maintained South Africa’s BBB- status, with a negative outlook, saying that while economic reforms were essential, the agency did not anticipate that South Africa would enter a recession. Moody’s maintained South Africa’s BAA2 status, saying it believed the country is nearing a turning point after several years of falling growth.

The view is less optimistic outside the analyst community. Earlier this year, South Africa’s lost its spot as Africa’ second largest economy to Egypt, and business confidence fell to a seven-year low earlier this week.