Commemorative South African rand banknotes sit on display in Pretoria, South Africa. (Photographer: Waldo Swiegers/Bloomberg)

South Africa’s Economy Slips Into First Recession Since 2009

(Bloomberg) -- South Africa unexpectedly fell into its first recession for almost a decade, exacerbating the rand’s decline from the recent emerging-market rout and heaping pressure on President Cyril Ramaphosa.

Africa’s most-industrialized economy shrank an annualized 0.7 percent in the second quarter, an outcome that was far worse than any forecaster had anticipated. The outcome casts a pall over the country’s new leadership, providing an uncomfortable parallel with the initial phase nine years of Ramaphosa’s predecessor, Jacob Zuma.

The news underscores the fragility of South Africa’s economy at at time when the country has been dragged into the emerging market turmoil of the past month that engulfed Turkey and Argentina.

South Africa’s Economy Slips Into First Recession Since 2009

Slack farming output and soft consumer spending have put pressure on Africa’s most-industrialized economy. Ramaphosa’s rise to power since December initially boosted sentiment and the rand following Zuma’s tenure of almost nine years. That optimism has faded as structural reforms weren’t implemented fast enough and global trade wars and turmoil in other emerging markets such as Argentina and Turkey soured sentiment.

“This economy remains in the doldrums, that we are in desperate need for policy certainty and structural reform to get us onto a growth path,” Elize Kruger, an economist at Paarl, South Africa-based NKC African Economics, said by phone. “This type of environment is difficult for job creation. We’ll get stuck in our low-growth term if we can’t get out of this.”

South Africa’s Economy Slips Into First Recession Since 2009

The rand weakened 2.9 percent down at 15.2973 per dollar by 4:27 p.m. in Johannesburg. Yields on rand-denominated government bonds due December 2026 rose 21 basis points to 9.22 percent, the highest level since before Ramaphosa became leader of the ruling African National Congress.

What Our Economist Says

“Virtually every component in GDP came in worse than expected, deepening the divergence in improved business sentiment and weakening economic activity. We are also becoming less optimistic about capital investment as the late phase of the domestic business cycle, which normally sees the highest degree of capital investment, appears to have been cut short by increased global financial market turmoil, with a focus on easily tradable emerging economics such as South Africa and Turkey. Increased uncertainty about domestic issues, such as land ownership is also likely to depress spending, on investment in particular. We will reassess our real GDP forecast for 2018, which we have already brought down to 1.2% from 1.5% previously. A reading of 0.5-1.0% now looks more likely.”

-Mark Bohlund, Bloomberg Economics

A contraction for the fourth quarter of 2016 was later revised to show growth, resulting in this being the first recession since the financial crisis of 2009.

Highlights from the release include the following:

  • Agriculture declined the most, recording an annualized 29.2 percent contraction
  • Mining production expanded 4.9 percent from the previous quarter
  • Manufacturing shrank 0.3 percent
  • Trade contracted 1.9 percent

©2018 Bloomberg L.P.