Any lingering hopes that South Africa might escape relatively unscathed from the global economic storms were dashed on February 5th when Tito Mboweni,governor of the central bank,predicted that Africa’s biggest economy would go through a rough patch for the next three to four years. Any politician who did not pass on that message to voters was living in cloud-cuckoo-land.
The same day,in an attempt to stimulate the economy and mitigate the effects of a recession,the bank chopped interest rates by a full percentage point to 10.5 per cent,the biggest single reduction since 2003. As Mr Mboweni confessed at the time,he personally would have preferred a two-point cut. This week he signalled that if growth figures for the last quarter of 2008,due out on February 24th,were worse than expected,there could be a further cut in rates ahead of the monetary-policy committee’s next scheduled meeting in April.
Like the rest of Africa,South Africa had until recently been doing relatively well. Between 2004 and 2007,its economy grew by a perky 5 per cent a year,after averaging a still respectable 3 per cent over the previous decade. Last year it had been expected to expand by around 4 per cent. But after slowing to a virtual standstill (up just 0.2 per cent) in the third quarter-its worst performance in a decade-it will be lucky to reach 3 per cent for the whole year. In the final quarter,the economy probably actually shrank,by as much as 4.6 per cent,some economists reckon.
This shows that,unlike the rest of the continent,South Africa’s relatively sophisticated and open economy is exposing the country to the full wrath of the global crisis. There is now a serious risk that South Africa,hitherto fairly well protected by its well-regulated banking system from some of the squalls,will follow its main trading partners in America,Europe and Japan into a technical recession-two successive quarters of negative growth-for the first time in 17 years.
Almost every day seems to bring more bad news. Manufacturing,mining and the retail trade,which together account for more than one-third of South Africa’s GDP,are already formally in recession. Last month,new car sales plunged by 35 per cent,the biggest drop in 25 years. The property market,in the doldrums for the past two years,is preparing for an even worse year ahead. Meanwhile,shrinking world demand and plummeting commodity prices have resulted in a sharp dip in South Africa’s exports.
So companies have begun to announce big lay-offs as demand falls and factories close. The official unemployment figure already stands at 23 per cent (unofficially it is probably 35 per cent or more) and is set to rise. Between 2003 and 2007,some 500,000 new jobs were being created every year. This year around 250,000 jobs are expected to be lost,so millions more will sink below the poverty line. Of the 4m officially deemed jobless,only just over 500,000 are eligible for unemployment benefit.
Still a rainbow country of extremes
Since the ruling African National Congress (ANC) came to power in South Africas first democratic elections in 1994,absolute levels of poverty have declined. But the discrepancies in wealth are still huge despite government job-creation schemes and the expansion of welfare benefits. The income of the top 10 per cent of the population (still predominantly white but including a growing number of middle-class blacks) is nearly 100 times that of the bottom 10 per cent.
Exacerbating the uncertainty over the country’s economy are the national and provincial elections which,President Kgalema Motlanthe announced this week,will be on April 22nd. The ANC is bound to win. But there is concern about a possible leftward shift in economic policy under Mr Motlanthe’s successor,Jacob Zuma. As the ANC’s leader,he will be ruling in alliance with the South African Communist Party and the Congress of South African Trade Unions,better known as COSATU,the country’s main union federation.
Are such fears justified? The ANCs election manifesto,which reads more like a wish list than a set of firm pledges,is too vague to indicate exactly what direction the new government will take. Mr Zuma,who is almost certain to be the next president despite his continuing legal problems (he is facing trial for corruption),insists there will be no radical shift to the left. But he recently hinted at a more interventionist approach,declaring that the days of the state remaining aloof from the market are now gone.
Many will be looking to see whether the well-regarded Trevor Manuel,South Africas finance minister since 1996,will keep his job. It was largely because of his prudent macroeconomics that government debt was slashed (from 48 per cent of GDP in 1994 to 31 per cent in 2007) and that South Africa achieved its first-ever budget surplus in 2007-08. Though that trend will now be reversed (he has just announced a budget deficit of 3.9 per cent for 2009-10),it has given the government some useful wiggle room. Mr Manuel has gained an almost mythical status for competence and integrity among foreign investors. His high (fourth) place on the ANCs recently announced list of candidates suggests Mr Zuma will want to keep him on. Whether Mr Manuel will agree is another matter.
Although South Africas economy has been taking a severer battering than expected,it may still be better placed than many others to weather the storms. On the bright side,the banking system looks healthy. Inflation,in double digits for most of last year,is projected to sink to under 6 per cent this year and next. Interest rates are expected to keep falling; though this may further weaken the rand,it should help South Africas exports.
All this,along with plans to spend 787 billion rand ($79 billion) on infrastructure,including preparations for hosting next year’s World Cup for football,may,with a bit of luck,let the economy pick itself up fairly fast once the world crisis begins to pass.
Mr Manuel predicts growth of 1.2 per cent this year,3 per cent next year and 4 per cent in 2011.
© The Economist Newspaper Limited 2009