Is South Africa heading toward

Is South Africa heading towards another recession?

While some key indicators point decidedly towards negative economic trends, the government insists that SA’s finances are stable for the time being. The question behind all these discrepancies, however, is which came first: chicken or nest-egg?

Is South Africa heading toward

Numerous indicators started painting a gloomy picture for SA’s economy this week, as variables hinting at a second consecutive quarter of contracting gross domestic product (GDP) might seem to be imminent. This would indicate that the country is indeed entering a recession.

Financial intelligence firm Fitch Ratings published a detailed report on South Africa’s markets, downgrading the country’s credit-worthiness to BBB chiefly on account of mining strikes, which have been crippling the economy for almost half a year now. Ratings agency Standard & Poor followed suit and ranked South Africa even lower at BBB-, creating rather a bleak outlook, as the Rand remains in the basement. But the South African government insists that the economy is far from entering another recession, with the Reserve Bank’s Monetary Policy Review report from last week saying that the situation was stable and contained.

Trying to add perspective to the fact that SA’s economy shrank 0.6 per cent in the first quarter of 2014, the government’s publication explained that ongoing challenges from violent mining strikes to electricity shortages to tense labour-market conditions all contributed to that downhill trend, adding that any long-term economic growth would need to be adjusted “to the downside” in the light of these findings, but not amounting to a recession.

However, analysts underscore that consumer spending had also gone down in the first quarter of the year despite the series of extenuating circumstances presented in the Monetary Policy Review paper, implying that the government might simply be trying to make excuses. Despite the Reserve Bank’s outlook on the situation, the World Bank took the very reasons cited in the government publication as sufficient reason to make a further material downward revision to SA’s growth outlook for the year.

Furthermore, continuing the trend of hiked interest rates set by the Reserve Bank in January 2014, it is becoming evident that while the government may not want to admit to a looming recession, it is pulling all the stops to avoid it from happening – which does not go far in creating investor confidence and is almost certainly going to affect the Consumer Price Index (CPI).

“Overall, inflation in South Africa is projected to be above target for an extended period of time, with risks tilted towards higher inflation. Over the longer term, this necessitates higher interest rates, and therefore a tightening cycle,” the Reserve Bank commented.

With the new government also having extremist elements, especially in the form of the Economic Freedom Fighters taking 25 out of 400 seats in parliament, confidence in business is slumping even further. President Jacob Zuma is yet to prove to investors that South Africa can still be trusted as a destination for investment, while some controversial pieces of legislation pushed through parliament during the last few months of his first presidency did not help to secure any such trust.

His recently appointed Finance Minister Nhlanhla Nene rejected the notion that the economy was facing any major troubles while the governor of the Reserve Bank also tried to remain optimistic about the country’s outlook. Gill Marcus told reporters that she was confident that SA would manage to stay shy of hitting another recession – despite ongoing strike action in the platinum sector entering its fifth consecutive month now and crippling one of South Africa’s most important industries.

But with further strike action looming on the horizon, as the National Union of Metalworkers of SA (Numsa) is now considering putting the gold mines on halt for industrial action, the forecast is clearly looking grim – with or without a recession on the cards.

The second quarter numbers from the mining sector, especially the struggling platinum mines, are tipped as the “make it or break it” indicators bound to predict how the economy is going to perform in the end, and whose prediction is just going to hold up. If the ongoing trend of almost 25 per cent contraction in the mining sector (compared to the most recent numbers from 2013) continues, South Africa might be in for a rude awakening.

The only light of hope at the end of the tunnel is directly linked to the recent performance of the US Dollar and the Euro, which could strengthen the Rand in market speculation as well as attract investment. However, these midterm concerns quickly fall on the back-burner when a recession might be waiting just around the corner.

By Sertan Sanderson, 2014