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South Africa’s unexpected recession confounds economists

Workers at the Nissan Rosslyn plant in Rosslyn, South Africa.
Lucky Nxumalo | City Press Gallo Images | Getty Images
Workers at the Nissan Rosslyn plant in Rosslyn, South Africa.

South Africa plunged into its second recession in eight years in the first three months of the year, even before a political crisis in the ruling African National Congress triggered rating cuts to junk status.

On an annualised basis Africa's most industrialised economy contracted 0.7 per cent in the first quarter after a 0.3 per cent drop at the end of 2016, Statistics South Africa said on Tuesday. The announcement confounded most economists' expectations for growth of about 1 per cent.

The two consecutive quarters of decline mean that South Africa had already begun its first recession since 2009 when President Jacob Zuma sacked Pravin Gordhan, his finance minister, shaking fragile investor confidence and threatening to splinter the ANC.

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The firing of Mr Gordhan, a critic of corruption in state-owned companies under Mr Zuma, pushed Fitch Ratings and S&P Global to cut South Africa's investment-grade status. ANC leaders openly criticised the president while the party's political allies called for his resignation.

The turmoil has increased in recent weeks, with Mr Zuma rebuffing an attempt to unseat him as state president despite the scandal over his friendship with the Gupta business family, who have denied using ties to him to influence public contracts.

Returning to recession will also deepen concerns about South Africa's failure to tackle deep-seated structural blocks on growth, including unemployment that has risen to its highest rate since 2003 at 27 per cent. Per-capita gross domestic product has been declining for several years and the economy has not grown for three consecutive quarters since 2015.

Tuesday's figures "confirm that South Africa's economy has contracted in four of the previous eight quarters", said John Ashbourne, Africa economist at Capital Economics. "This is among the worst performances recorded anywhere in the emerging world."

All sectors of the economy apart from agriculture and mining contracted in the quarter, while household spending fell 2.3 per cent, the statistics agency said.

Farming expanded at its fastest rate in a decade as it recovered from a severe drought last year. But consumer-focused sectors, such as manufacturing and finance, posted particularly sharp declines.

"This may suggest that high unemployment and stagnant wages are finally dragging down the long-resilient South African consumer sector," Mr Ashbourne said. In May the South African Reserve Bank cut its growth forecast for this year by 0.2 percentage points to 1.2 per cent.

Investors fear that the ANC's battle over replacing Mr Zuma — who is in his second and final term as state president, and is due to step down as party leader in December — will distract the organisation from making difficult structural reforms and lead to a lost year for the economy.

Cyril Ramaphosa, the deputy president, is competing against Mr Zuma's ex-wife Nkosazana Dlamini-Zuma in the leadership contest. The outcome of that race will have a big effect on the party's fate in 2019, where it faces the toughest elections since taking power in 1994.

Mmusi Maimane, leader of the main opposition Democratic Alliance, said: "It is the ANC that has led us to this point of economic collapse . . . it is a toxic combination of policy uncertainty and grand corruption which has led us to this point."

In a statement released on Tuesday, the Treasury said: "The Minister of Finance Malusi Gigaba will be seeking a meeting with business leaders soon to discuss ways of working together to achieve inclusive economic growth.

The South African rand weakened by 1.4 per cent to less than R12.90 against the dollar after the GDP data release.