South African economy is unlikely to fall into a recession, the Reserve Bank said in its Monetary Policy Review released on Tuesday that economic growth would be likely to improve in the second quarter, although it would be modest.
However South African Reserve Bank governor Gill Marcus played down fears of a recession, despite concerns of another poor economic performance in the upcoming quarter.
In its June Monetary Policy Review (MPR) document, the central bank said that the domestic economy has suffered several adverse supply shocks particularly from strike action as well as electricity shortages which led to negative first quarter growth.
Last week, Gross Domestic Product (GDP) data released by Statistics South Africa showed that seasonally adjusted GDP at market prices slumped at an annualised rate of 0.6% for the first quarter of 2014.
Economic growth contracted mainly as a result of the costly, 19-week wage strike at platinum mines. The strike curbed mining and manufacturing production in the first three months of the year.
Some analysts are already forecasting another contraction for the second quarter given that the strike is continuing. A second consecutive quarter of negative economic growth would mean a recession.
“The domestic economy has also suffered a number of adverse supply shocks, particularly from strike action and electricity shortages, culminating in negative first quarter growth in 2014 – the economy’s worst performance since the 2009 recession. Although the second quarter is expected to show some improvement, the risks to the 2014 forecast are to the downside,” said the bank.
This decrease in growth — the worst since the second quarter of 2009 when the world’s economy dipped as a result of the global recession — comes after the GDP grew by an annualised rate of 3.8% in the fourth quarter of 2013.
At the Monetary Policy Committee (MPC) meeting in May, the bank revised down growth from 2.6% to 2.1%.
According to the Review, inflation is projected to be above the bank’s inflation target range for an extended period of time.
In April the Consumer Price Index (CPI) breached the bank’s 3 to 6% target range coming in at 6.1%.
“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,” noted the bank in the Review.
At the last MPC meeting, the bank continued to hold the view that it is in a rising interest rate cycle. The bank hiked interest rates at its first meeting of the year in January.
“However, with domestic economic growth weak, and world inflation and interest rates remaining low, monetary policy tightening is likely to be moderate. This will provide continued support to the economic recovery,” it said.
The review found that household expenditure has limited prospects for improvements in 2014 due to rising inflation, weak employment growth and muted wealth effects.
“Household expenditure will also be constrained by continued moderate credit growth, knock-on effects from the mining strike and rate hikes, which raise debt service costs and disincentivise further borrowing,” it noted.
The bank expressed “great” concern at the country’s antagonistic labour relations and persistent strikes. “In particular, changes in the structure of mining unionisation over the past few years have caused multiple, often violent disruptions to production, the most recent example being the record-length and on-going platinum-sector strike. These events have been costly in several ways, depriving households of wage income and retailers of customers, damaging exports, and ultimately compromising investment and employment,” noted the Review.
The MPR, which reviews domestic and international developments that have affected inflation and the impact of the monetary policy stance, is published twice a year.