GDP Figures Will Confirm Recession

by Melanie Bowler and Ruth Stroppiana

Key Points

First quarter national accounts next week are expected to confirm South Africa’s first recession in 17 years.

High-frequency indicators suggest the pace of decline accelerated.

For 2009, South Africa looks set to contract by around 1%.

We expect the shrinking economy and cooling inflation to prompt the SARB to cut interest rates by another full percentage point next week.

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

The release of first quarter national accounts next week is expected to confirm South Africa’s first recession in 17 years. The economy contracted for the first time in a decade in the final quarter of 2008. In seasonally adjusted annualized terms, GDP contracted 1.8% q/q, driven in part by a massive 21.8% q/q fall in manufacturing output. High-frequency indicators suggest the decline accelerated in the opening three months of the year.

Despite the sharp contraction in key sectors, no major fiscal stimulus measures have been added to the annual budget presented in February. Instead, the government is relying on the existing R787 billion infrastructure program over the next three years to support economic activity. That means further monetary loosening will be required to support domestic demand in coming quarters.

The South African Reserve Bank has already cut interest rates four times since December, by a cumulative 350 basis points, in a bid to stave off a prolonged recession. With inflationary pressures and expectations easing, the central bank has further room to manoeuvre. We expect the SARB to cut rates by another full percentage point at its monetary policy meeting next week. This would push the key repo rate down to 8%, 400 basis points lower than in December 2008. Nevertheless, tight credit conditions will curb consumption and investment. Both private sector credit extension and money supply growth have slowed sharply in recent months.

For this year, South Africa looks set to contract by around 1%. 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. 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. The silver lining, however, 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 G-20 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.

This commentary is produced by Moody’s Economy.com, a division of Moody’s Corporation, engaged in economic research and analysis. Commentary produced by Moody’s Economy.com is independent and does not reflect the opinions of Moody’s Investors Service Inc., the credit ratings agency which is also a subsidiary of Moody’s Corporation.

If sourcing this article please quote Moody’s Economy.com.

Tags: GDP, Interest Rates, Moody's Corporation, Recession, SARB, South Africa

This entry was posted on Friday, May 22nd, 2009 at 1:19 pm and is filed under News. You can follow any responses to this entry through the RSS 2.0 feed.