Plunging business sentiment points to South African recession - CNBC Africa

Plunging business sentiment points to South African recession

Southern Africa

by Reuters 0

Plunging business sentiment points to South African recession. Photo: Pixabay.

South Africa's economy looked set on Tuesday for its first quarterly contraction in a year after measures of business sentiment tumbled, dragged down by shrinking consumer spending that has sunk hopes of a retail-led recovery.

Rising inflation due to severe drought and a weakening currency have triggered a steep rise in lending rates over the past two years, strangling sentiment among businesses and consumers in Africa's most industrialised economy.

A survey published on Tuesday by the South African Chamber of Commerce and Industry showed business sentiment tumbled in May to an all-time low as the manufacturing and retail sectors struggled.

The broader Rand Merchant Bank (RMB) index, compiled by the Bureau for Economic Research, fell to 32 in the second quarter, the lowest in seven years, from 36 in the first quarter.

The reading was worse than that seen during the 2008/9 global financial crisis due to lower confidence among retailers.

The data prompted economists to forecast that first quarter GDP numbers expected on Wednesday would show a contraction.

Having revised its initial 0.6 percent reading lower, government statistics agency StatsSA says the economy grew 0.4 percent in the final quarter of 2015.

Even without two consecutive quarters of contraction, widely accepted as indicating a recession, "for the year as a whole, we think growth will be barely above zero," said chief economist at Nedbank Dennis Dykes.

The central bank, which has raised interest rates by 200 basis points over the past two years, expects the economy to grow by 0.6 percent in 2016. Inflation was 6.2 percent in April.

The RMB survey showed confidence among manufacturers in negative territory, with reduced demand locally worsened by low exports despite the rand having weakened nearly 20 percent against the dollar over the last 12 months.

"The operating environment for most manufacturers continued to be characterised by poor domestic sales volumes, rising inventories of finished goods and an apparent lack in ability to raise domestic as well as export selling prices," RMB said.

The manufacturing and mining sectors are already in contraction while retail, so far resilient to the downturn, is also beginning to slow as cash-strapped consumers cut down on purchases, analysts say.

Data shows consumers are increasingly taking debt to pay for basic items while the government is planning sharp expenditure cuts.

Rising inflation and lending rates had "put a big squeeze on disposable income generally," Dykes said, preventing the government from spending its way out of trouble as it did during the previous recession in 2009.

 

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