Plunge in manufacturing output extends recession

The South African economy contracted for the third consecutive quarter in the three months through June.

Second quarter national accounts data show South Africa's economy contracted for the third consecutive quarter. GDP retrenched 0.8% q/q, following a 1.7% drop in the first stanza. On a year-ago basis, output came in 2.8% lower. Manufacturing, which accounts for 14% of GDP, was the key drag, accounting for more than half of the contraction. Output slid for the fourth consecutive quarter as producers slashed capacity amid weak external demand for vehicles and machinery. Monthly manufacturing data show production is still more than 20% beneath the peak set in April 2008. Finance and trade-related industries, which combined account for nearly 35% of GDP, also continued to contract in the second stanza. Though South Africa's financial system was spared the worst of the global financial crisis, finance, real estate and business services fell for the second straight quarter, constrained by tight credit. Meanwhile, wholesale, retail, hotels and restaurants lost ground for a fifth consecutive quarter, suffering from the broad deceleration of activity and dampened consumer demand.

If there was a silver lining in the national accounts, it was an easing in the pace of contraction from the first three months of the year. Further, South Africa's construction industry expanded at a robust pace and managed to provide the largest contribution to the economy, thanks to strong government construction spending in preparation for the Football World Cup in 2010. Government services also made a positive contribution to GDP, whilst modest improvement in monthly exports helped lift mining and quarrying output.

Another positive development is moderating inflation pressures, which have given the South African Reserve Bank enough room to slash interest rates by 500 basis points since December. This monetary stimulus will help steer the economy toward recovery in the second half of 2009. Nonetheless, with manufacturing, finance and trade still in decline, the pace and nature of the recovery remain uncertain, as these industries account for nearly half of GDP. With joblessness on the rise, domestic demand will likely be subdued in the second half. Ongoing labour disputes and frequent strikes also add downside risk to the outlook.

The path back to self-sustaining growth will be long and require deft guidance by policymakers. However, deteriorating public finances have limited the government's ability to mount an aggressive fiscal stimulus beyond the current, massive R787 billion public infrastructure program over the next three years.

*This article was first published by Moody's Economy.com

Article from: www.moneyweb.co.za