UPDATE 3-South Africa dodges recession, faces more pain ahead

Tue Aug 26, 2014 12:21pm EDT

* Q2 growth at 0.6 pct vs Q1 contraction of 0.6 pct

* Missed 0.9 pct consensus forecast for Q2

* Troubled mining industry drops 9.4 quarter-on-quarter

* Agriculture grows nearly 5 pct after bumper grain harvest (Adds context about growth forecasts, economist comment)

By Xola Potelwa and Mfuneko Toyana

PRETORIA, Aug 26 (Reuters) - South Africa avoided slipping into recession in the second quarter as solid growth in agriculture and finance outweighed a plunge in production in the strike-hit mining sector, data showed on Tuesday.

Africa's most developed economy has been battered by labour unrest that has disrupted the mining and auto sectors and hurt business confidence, while a weak rand currency has increased food and fuel prices, crimping household purchasing power.

The economy grew 0.6 percent in the second quarter seasonally adjusted, compared to the previous quarter when it contracted 0.6 percent, Statistics South Africa said on Tuesday.

While the economy avoided recession, defined as two consecutive quarters of economic contraction, growth was below a Reuters poll forecast for 0.9 percent. Adding pressure on the economy, annual inflation is running above 6 percent and analysts expect the central bank to raise interest rates again this year, after lifting them twice already.

"The economy is and will continue to be under pressure," said Cheslyn Francis, a portfolio manager at Afrifocus Securities. "Production will have to pick up. Manufacturing has to pick up."

Output in the mining and quarrying industry plunged 9.4 percent quarter-on-quarter in April-June, after being hit by a five-month strike in the platinum industry, the longest in South Africa's history.

Clouding the outlook, third-quarter economic output is likely to be hurt by the impact of an engineering strike that ended last month, said Peter Attard Montalto, an emerging markets analyst at Nomura International.

"There is more bad news to come and we should remember the level of growth seen today is exceptionally low and totally insufficient to solve South Africa's deep developmental and jobs problems," he said in a note to clients.

President Jacob Zuma's ruling African National Congress (ANC), which comfortably won an election in May, is struggling to deliver convincing economic growth to lift millions out of poverty and reduce unemployment of 25 percent.

The ANC is also keen to soothe investor concerns over frequent labour disputes.

On a year-on-year basis, the economy grew by 1 percent in April-June, lagging analysts' forecasts for 1.2 percent and compared with growth of 1.6 percent in the previous three months.

COMPANIES SCALING BACK

"What you're going to see now is another round of downward revisions to South Africa's growth estimates," said Kevin Lings, chief economist at Stanlib.

At the start of 2014 analysts forecast economic growth of 2.8 percent this year, but by this month had downgraded forecasts to 1.7 percent growth, according to a Reuters poll.

Manufacturing production, the economy's largest sector after services, fell by 2.1 percent from the first quarter.

Agricultural production, however, rose nearly 5 percent, buoyed by bumper grain harvests, a trend that should also help contain food prices and inflation.

Finance and real estate expanded by 1.5 percent, the data showed.

The sluggish growth has prompted companies to scale back on big projects, particularly in mining and manufacturing.

"In terms of civil engineering, mining activities and large infrastructure projects, there's not much going on," said Kobus Verster, the chief executive of Aveng Ltd.

Aveng, South Africa's second-largest building and engineering firm by market value, reported a 10 percent drop in full-year earnings on Tuesday, citing weakness in the manufacturing, steel and mining industries, as well as the impact of labour unrest.

"In terms of our of manufacturing, especially our steel environment, there's very limited demand and almost no growth," Verster said.

The rand showed little reaction to the economic data, and was at 10.6950 to the dollar at 1124 GMT, slightly firmer from its overnight close of 10.7125.

Bonds were also little changed, with the yield on the 2015 debt at 6.54 percent, while the longer-dated 2026 bond was unmoved at 8.175 percent. (Additional reporting by Ed Stoddard; Writing by David Dolan; Editing by Pascal Fletcher/Raissa Kasolowsky/Susan Fenton)

Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.