Economy faces tough times

SA’s economy faces a rough ride this year, with job losses set to keep consumer spending in check and a slowdown in private investment likely to gather momentum.

Several top analysts are predicting growth will slow to less than 1% this year — its lowest since 1998 — with a technical recession in the first half of the year looking highly likely.

Falling interest rates, petrol prices and inflation will help ease the pain for consumers and companies, but will not make SA immune to the deepening global recession, they say.

“This year is going to feel awful compared to 2008, particularly in the first half,” said Absa Capital research head Jeff Gable. “We think the economy is currently contracting, and for 2009 as a whole will struggle to grow by even 1%. That means weak confidence, job losses, and little opportunity to feel good even if inflation and interest rates both head lower.”

Absa Capital thinks the economy shrank by 0,5% in the fourth quarter of last year, and will contract by the same amount in the first quarter of this year, marking the first technical recession for SA since 1992. It revised its annual growth forecast down from more than 2% last month.

So has Nedbank. It predicts growth of just 0,9% this year, and a contraction of 0,6% during the first quarter.

Nedbank chief economist Dennis Dykes said: “The main reason is the global economy and its spreading effect on exports. It would be very unusual for SA to go charging ahead when the G-7 is in a recession.”

Many developed economies — including the US, Europe, Britain, and Japan — are mired in a downturn, which analysts believe will last until the end of next year. This will curb demand for local exports, which have already waned in value terms since a dive in commodity prices late last year.

This has hit SA’s mining sector, which accounts for just 5% of gross domestic product (GDP) but punches above its weight in terms of employment. Miners have already announced plans to cut 14000 jobs, pending negotiations with unions.

More job losses will follow early this year, with official data already showing employment down in the manufacturing and retail sectors, which together account for 30% of GDP.

The finance sector, the economy’s biggest, is also likely to shed jobs in response to lower credit demand. This means embattled consumers, who drive 60% of the economy, are unlikely to feel confident enough to spend freely again.

“I think 2009 will be a more difficult year,” said RMB economist Kay Walsh. “There’s been a lot of jubilation about petrol prices and inflation coming down but consumers are still indebted and some are losing their jobs.”

Lower interest rates will help ease the debt burden, but household spending is set to contract for a few more quarters after the first fall in a decade in the third quarter of last year. Investment spending was expected to take up the slack, but the global slowdown forced many companies to cut or put off expansion.

Public-sector investment should stay on track, driven by plans to spend more than R600bn in the next three years on transport, power and social infrastructure. A further stimulus is likely in next month’s budget, but overall, investment will slow from last year.

RMB sees economic growth slowing to 1,9% this year, from an earlier estimate of 2,8%. That compares with expansion of more than 3% last year, down from more than 5% over each of the previous four years.

Article from: www.businessday.co.za