Finance Minister Malusi Gigaba on Tuesday said he would seek a meeting with business leaders to shore up efforts to stimulate growth after the country officially entered its second recession in nine years as GDP growth contracted by 0.7 percent in the first quarter.
National Treasury said the latest quarterly figures put pressure on its forecast of 1.3 percent GDP growth for the year and would hamper service delivery.
“The current state of the economy puts more pressure on us as government, business, labour and broader society to intensify our growth programme and improve confidence as a matter of urgency to arrest the decline and set the economy on a higher growth trajectory,” the finance ministry said.
“The current growth rate, if sustained, will lead to a further decline in GDP per capita and revenue, risking the sustainability of our fiscal framework and more importantly undermining the delivery of social services.”
The treasury said the first quarter figures were worse than expected, a view echoed by economists who had anticipated a slight rebound after Gross Domestic Product (GDP) growth contracted by 0.3 percent in the last quarter of 2016.
The downturn means the country has now had had two consecutive negative growth quarters which technically signals a recession.
The biggest negative driver for the first quarter was the trade, catering and accommodation industry, which shrank by 5.9 percent, according to figures released by Statistics South Africa. Manufacturing declined by 3.7 percent and household consumption by 2.3 percent.
In total, seven out of ten manufacturing divisions showed negative growth, among them petroleum, chemical products, rubber and plastic.
On the other hand, mining and agriculture grew by 22.2 and 12.8 percent respectively.
Economist Dawie Roodt said he had expected a more positive figure given the relatively low base of the previous quarter.
“We are in deep trouble. It is a deep and painful recession,” Roodt said, who added that he expected GDP growth for the year to be at just under or just above one percent.
“And that is not good because it means that the economy is growing slower than the population.”
Roodt said though agriculture and mining may continue to somewhat mitigate the contraction of other sectors, the size and spending power of the public service could no longer be a key sustaining factor for household spending as a component of GDP growth, as it had reached a limit where the fiscal account could no longer afford it.
The news of negative GDP growth was foreshadowed last week by the release of statistics which showed that unemployment had hit a 14-year high at 27.7 percent.
But FNB senior analyst Jason Muscat said the first quarter dip was significantly worse than bearish expectations of zero percent growth. He said without growth in the primary sector, GDP would have contracted by a massive two percent.
“Our concern is that the numbers are backward looking, and don’t reflect the confidence shock we expect post the cabinet reshuffle and credit downgrades,” Muscat said.
Epic MSLGroup consultants said higher unemployment could have a dampening effect on GDP for coming quarters.
“SA is in a difficult position at the moment with rising unemployment because this means that there are fewer consumer players contributing to the economic activity, as we saw in the GDP report that consumer expenditure had declined. If the unemployment rate increases further then it could have a negative impact on the GDP for the coming quarters.”
It noted that inflation was holding steady so far within the South African Reserve Bank’s target band of three to six percent but also noted that the volatility of the political environment complicated any reading of the economic situation.
However, despite many challenges, South Africa remained an attractive investment destination.
“Admittedly, we may be suffering from self-injected harm, but there are global injections as well into our economy and this too has an impact on how we are viewed as an investment destination relative to other regions across the globe.”
Treasury said there were was some green shoots that South Africa can leverage on to boost its own economic growth outlook, including improving global growth, stabilising commodity prices, more favourable climate conditions, reliable electricity supply, and less volatile labour relations.