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UPDATE 2-Protracted platinum strike pushes South Africa towards recession
May 27, 2014 / 2:35 PM / 3 years ago

UPDATE 2-Protracted platinum strike pushes South Africa towards recession

* First quarterly GDP contraction since Q2 2009

* Mining output sees steepest slump in decades

* Weak growth clouds outlook for interest rates (Adds details, updates market reaction)

By Stella Mapenzauswa

PRETORIA, May 27 (Reuters) - South Africa’s economy shrank in the first quarter of this year, the first quarterly contraction since a recession five years ago, as mining output plummeted due to a protracted strike in the platinum sector.

The economic decline presents a challenge for new Finance Minister Nhlanhla Nene, appointed this week to steer an economy that has struggled to grow by more than 2 percent annually or generate many new jobs since the 2009 recession.

The weak data also undermines the case for more interest rate hikes this year after the central bank lifted its benchmark rate by 50 basis points in January, although it remains concerned about rising inflation pressures.

Gross domestic product shrank 0.6 percent quarter-on-quarter in the first three months of the year after a 3.8 percent increase in the final quarter of 2013, Statistics South Africa said on Tuesday.

GDP was dragged into negative territory by a 24.7 percent plunge in mining production and a 4.4 percent fall in factory output.

On an unadjusted year-on-year basis, GDP was up 1.6 percent in the first quarter compared with 2 percent previously.

Mining and manufacturing account for about a fifth of Africa’s most advanced economy, but have been plagued by strikes in the last few years, reflecting rigid labour laws that critics say are a deterrent to investment.

The current mining strike, over wages and now in its fifth month, is the costliest and longest in South Africa’s history.

The first quarter decline in mining output was the steepest since 1967 due to stoppages at the country’s platinum mines, which normally account for 40 percent of global production of the precious metal.

Economists polled by Reuters had expected GDP in South Africa - recently overtaken by Nigeria as Africa’s biggest economy - to contract by just 0.1 percent quarter-on-quarter while expanding 1.9 percent compared with the same period last year.

“With industrial unrest still continuing, there is little hope for a robust recovery in mining output in Q2 2014,” Standard Chartered analyst Razia Khan said.

“The challenges for the South African economy persist.”

The rand fell to a session low of 10.4570 against the dollar after the data, down about 1 percent on the day, and was still on the back foot at 10.4300 by 1256 GMT.

Sustained rand weakness could force the Reserve Bank’s hand and spur another interest rate rise to rein in inflation, with CPI seen climbing higher after breaching the top end of a 3-6 percent target band in April.

The South African Reserve Bank (SARB) kept interest rates steady at 5.5 percent last week to give the economy breathing space, but indicated that it was still firmly in a tightening cycle.

“The SARB will have no easy decisions when deciding on the speed and timing of policy rate normalisation given an increasingly uncomfortable inflation environment,” Jeffrey Schultz, economist at BNP Paribas Cadiz Securities, said.

“We continue to factor in between 50-75 bps in rate hikes in the second half, but acknowledge that this could be even shallower should real economy indicators continue to disappoint.” (Additional reporting by Xola Potelwa; Editing by Susan Fenton)

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