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South African economy enters second recession in two years

Economic Indicators Mar 03, 2020 17:21
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By Mfuneko Toyana and Tumelo Modiba

PRETORIA (Reuters) - South Africa entered its second recession in two years in the final quarter of last year as agriculture, transport and construction contracted, data showed on Tuesday, highlighting the impact of power cuts on the economy.

The recession is another setback to President Cyril Ramaphosa's efforts to revive the economy and stave off a downgrade of the country's sovereign debt to below investment grade by rating agency Moody's.

Statistics South Africa said the economy shrank 1.4% in the fourth quarter, following a revised 0.8% contraction in the third quarter. Agriculture declined 7.6%, transport 7.2%, construction 5.9%, electricity 4% and retail 3.8%, the data showed.

"You can lay a lot of the blame on (power utility) Eskom and the loadshedding (power cuts). But you must also blame government -- reform is happening way too slowly," said Wayne McCurrie, an FNB portfolio manager .

Regular power cuts as Eskom fails to meet electricity demand have seen a steady decline in South African business and consumer confidence.

Eskom implemented the worst power cuts in more than a decade in December. It forced some mines to shut down and disrupted thousands of smaller businesses that couldn't rely on backup generators.

Spending shrank 1.2% in quarter-on-quarter terms after contracting by a revised 0.4% in the third quarter, Stats SA said.

"Spending of money is different, I feel it in the fluctuation of my lifestyle. I'm spending less," said self-employed Msimeki Mabuza, 34.

South African retailers have struggled to increase earnings as cash-strapped shoppers spend money on food rather than higher-margin discretionary goods such as electronics, hurting the likes of Walmart-controlled Massmart (J:MSMJ).

Small businesses were also feeling the pain.

"It is tough," said 62-year old Lesley Nkosi, who sells fruits and vegetables on the sidewalk of a street a few blocks from Pretoria's Union Buildings, which houses Ramaphosa's office. "Since last year I have noticed people aren't buying as much as they used to. They don't have money."

Banks have also struggled to increase their earnings at home and are increasingly relying on businesses elsewhere in Africa to maintain their performance.

Nedbank (J:NEDJ), one of South Africa's four largest banks, on Tuesday reported a near 7% drop in full-year profit and revised a key profitability target as the worsening economy pushed up defaults and cut demand for credit.

Last week, the National Treasury cut its 2020 economic growth forecast to 0.9% and said it would cut the public-sector wage bill to contain a rising budget deficit.

"The Treasury is now clearly on a pro-growth trajectory," Razia Khan, chief Africa and Middle East economist at Standard Chartered (LON:STAN) Bank. "The shock nature of this GDP print highlights just how urgent an exercise that is, and how there is no room to get it wrong."

South African economy enters second recession in two years

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