A SHOCK contraction in the economy in the second quarter poses a quandary for the South African Reserve Bank.
It may have to postpone further interest rate increases while the Treasury could hold off on tax hikes in the medium term to avoid greater damage to the ailing economy.
Statistician-general Phali Lehohla said the 1.3% annualised contraction in gross domestic product (GDP) was sobering for policy makers targeting growth of more than 5% through the National Development Plan. GDP rose 1.3% in the first quarter.
"Those who set these targets now have to sit up straight and say ‘what are we going to do to ensure that we get to that target’ and I think that is the significance of these numbers."
The contraction was the first since the first quarter of last year when the long drawn-out platinum mining strike started.
Power outages and weak demand were mainly responsible for a drop in mining and manufacturing, while decreases in crops and horticultural products due to a drought severely affected growth in the agriculture sector.
A marginal income-tax hike in April and higher interest rates have left consumers with less disposable income.
Retail spending has also been muted. Although there was a 3.5% rise in June compared to a year ago, it was off a low base and Investec estimated it would have otherwise shrunk. Poor growth means the economy will not create jobs for SA’s almost 5-million unemployed.
Some economists have started revising their growth forecasts down for this year after the decline, but only a handful think a recession is possible.
"This (contraction) is the impact of Eskom load shedding. We revise down GDP growth from 1.9% to 1.6%," said emerging markets economist at Nomura International Peter Attard Montalto.
FNB chief economist Sizwe Nxedlana said SA could enter into a recession — two consecutive quarters of contraction — if the wage disputes in the gold and coal industries resulted in strikes and lost production.
Despite a significantly weaker rand, poor economic growth would make it hard for the Bank to justify an interest-rate increase next month, BNP Paribas Cadiz economist Jeff Schultz said on Tuesday. The Bank’s monetary policy committee raised rates 25 basis points last month and said it was in a hiking cycle.
But the Bank could still raise rates 25 basis points next month on a weaker rand contributing to higher inflation and inflation expectations remaining above 6% next year, Citi economist Gina Schoeman said.
The Bank has said it was concerned about the weak rand stoking inflation.
Weak demand, unconducive policies, lower production, and strikes were among "myriad" of factors contributing to weakness in the economy, Mr Lehohla said.
Financial services, real estate and business services reflected growth of 2.7%. Despite the contraction in the second quarter when compared with the first quarter, the economy grew by a lower than expected 1.2% in the second quarter of this year when compared with the second quarter of last year.
Mr Lehohla said government institutions needed to provide adequate and reliable data so that the statistics his organisation released reflected what was really happening in the economy. He called for better co-ordination and the provision of a "statewide competent workforce".
Statistics SA also released mining production data on Tuesday which showed a 4% acceleration in June compared with 2.7% a year ago due to higher production in platinum group metals (PGM), manganese ore, diamonds, and chromium ore.
The PGM output helped the spike as it was also off a low base due to last year’s strike. But output still fell in the second quarter compared with the first.