Features

South Africa slips into recession

South Africa's economy fell into recession in the second quarter of 2018, contracting by 0.7% after a decline in GDP between January and March.

913_MW_P06_Markets
Cyril Ramaphosa may struggle to win a convincing election victory and push through reforms

Emerging-market stocks have slipped into a bear market, falling by 20% from their latest peak. But this "should not be regarded as evidence of a systemic crisis", says Lex in the Financial Times. Keep the big picture in mind. Developing economies should still manage to grow by 5% this year and they have gradually reduced their vulnerability to crises by keeping a lid on inflation and public and foreign-currency debt in recent years. Debtmaturities have become longer too.

A strong dollar has "marked a dividing line between the US and the rest of the world". But the emerging countries whose currencies and stockmarkets have been worst hit are those whose problems were self-inflicted. Investors have therefore been especially worried about Turkey and Argentina in the past few weeks. Their latest headache, however, is South Africa.

From Ramaphoria to recession

We learnt last week that the economy fell into recession in the second quarter of 2018, contracting by 0.7% after a decline in GDP between January and March. Agriculture, transport and retail were the chief culprits, according to Reuters. The picture was gloomy all round, says The Economist, especially in farming, which was badly hit by drought. "The rand, already roiled by a sell-off of emerging-market currencies, plunged to depths not seen since the worst moments of former president Jacob Zuma's tenure." Unemployment has ballooned to a frightening 37.2%. This dismal data might make it harder for the South African Reserve Bank to raise interest rates to squeeze out inflation, which has now reached 5.1%.

The "Ramaphoria" that surrounded South African president Cyril Ramaphosa's election six months ago has waned. The ruling African National Congress (ANC) is still destined for election victory next year, says Ed Cropley on Breakingviews, "but without asolid win Ramaphosa's grip on the party, and his ability to push through growth-boosting economic reforms, will be in doubt". Investors' hopes may have been too high when he took over.

A long uphill struggle

After nine years of corruption and overspending, it was never going to be easy to rein in spending and turn around bloated state firms. For now, however, the government doesn't seem to be doing itself any favours. It is pushing a spending package that includes infrastructure projects and subsidies for farmers, according to The Economist. "How the government would pay for this is amystery." Tax collection slumped andtax evasion soared under Zuma. Tohelp narrow a yawning budget deficit, Ramaphosa increased value-added tax earlier this year. But that has hurt consumer spending.

Meanwhile, another headache looms: areview of the country's credit rating is due in October. "If Moody's cuts [it] to junk, South African bonds would be thrown out of global indices, prompting a sell-off. That implies higher borrowing costs and yet more pressure on the economy."

Recommended

I wish I knew what an emerging market was, but I’m too embarrassed to ask
Too embarrassed to ask

I wish I knew what an emerging market was, but I’m too embarrassed to ask

This week's “too embarrassed to ask” explains what emerging markets are, and why you might want to invest in them.
9 Sep 2020
Bullish investors return to emerging markets
Stockmarkets

Bullish investors return to emerging markets

The ink had barely dried on the US-China trade deal before the bulls began pouring into emerging markets.
27 Jan 2020
Inflation is the easiest way out of this – just don’t expect politicians to admit it
Inflation

Inflation is the easiest way out of this – just don’t expect politicians to admit it

The UK government borrowed £34.1bn in December, a record amount for that month. Britain's debt pile now amounts to 100% of GDP. How are we going to pa…
22 Jan 2021
Beware: inflation is starting to stir in the US
Inflation

Beware: inflation is starting to stir in the US

With US consumer prices up by 1.4% in the last year, concern about inflation is now everywhere.
22 Jan 2021

Most Popular

Why we won’t see a house-price crash in 2021
House prices

Why we won’t see a house-price crash in 2021

Lockdown sent house prices berserk as cooped up home-workers fled for bigger properties in the country. And while they won’t rise quite as much this y…
18 Jan 2021
The world’s fund managers are getting very bullish – be careful out there
Stockmarkets

The world’s fund managers are getting very bullish – be careful out there

The latest survey of fund managers shows them to be extremely bullish on all the same things. And that, says John Stepek, means the market is in dange…
21 Jan 2021
Prepare for the end of the epic bubble in US stocks
US stockmarkets

Prepare for the end of the epic bubble in US stocks

US stocks are as expensive as they’ve ever been. How can you prepare your portfolio for a bubble bursting?
18 Jan 2021