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Tense labour climate exacts big economic toll

20th June 2014

By: Terence Creamer

Creamer Media Editor

  

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The World Bank has made a further material downward revision to South Africa’s growth outlook for 2014, citing tense labour-market conditions as a key reason, along with weak electricity supply and a tighter monetary policy.

The bank’s latest Global Economic Prospects (GEP), released a day after government’s intervention to end the protracted platinum industry strike stalled, forecasts that South Africa would grow by only 2% this year, 3% next year and 3.5% in 2016.

The revision was made amid a larger warning that developing countries were headed for a year of disappointing growth of 4.8%, down from its January estimate of 5.3%.

The latest South African forecast represents a sharp pullback from the 2.7% outlook published in June 2013 and is also substantially lower than the 2.3% it predicted in April this year.

The forecast is also worse than the 2.3% figure published by the International Monetary Fund in its April World Economic Outlook and follows the economy’s 0.6% contraction in the first quarter of 2014 – a quarter in which the mining sector’s contribution fell by a massive 24.7%, largely as a consequence of the platinum industry strike.

The GEP forecast was also but the latest in a string of weak economic data, with the South African Reserve Bank having also lowered its official growth outlook to 2.1% from an earlier forecast of 2.6%.

In February, then Finance Minister Pravin Gordhan predicted growth of 2.7% for 2014, but his successor, Nhlanhla Nene, is likely to have to moderate that expectation when he releases his Medium-Term Budget Policy Statement in a few months from now.

The country’s unemployment rate has also again breached the 25% level, while business confidence and manufacturing surveys have declined during the course of the year. The Kagiso Purchasing Managers Index fell to a near five-year low of 44.3 index points in May, while 60% of respondents to the latest Rand Merchant Bank and Bureau for Economic Research Business Confidence Index indicated discontent with prevailing business conditions.

Reserve Bank governor Gill Marcus last week argued that South Africa could no longer blame weak global economic conditions for its flagging economic performance, citing the main cause as being “domestically driven” and “largely self-inflicted”.

The GEP noted that growth in South Africa, now the continent’s second-largest economy after Nigeria, slowed to 1.9% in 2013, as a result of structural bottlenecks, tense labour relations, low investor confidence and weak external demand. It said “tight monetary policy, combined with labour strikes and weak electricity supply”, would keep growth subdued in South Africa during the current year.

Growth in sub-Saharan Africa, meanwhile, is expected to remain flat at around 4.7%, mainly as a result of economic weakness in South Africa and oil-infrastructure bottlenecks in Angola.

“Growth in the rest of the region is expected to remain robust, boosted by resilient domestic demand,” the bank said, indicating that, excluding South Africa, the region would have expanded by 5.8% in 2014.

“Medium-term growth prospects for sub-Saharan Africa remain favourable, with regional growth projected to remain broadly stable at 4.7% in 2014, rising moderately to 5.1% in 2015 and 2016, supported by investments in natural resources and infrastructure, improved agricultural output and firming external demand.”

However, the bank also stressed that regional risks remained skewed to the downside and included weaker growth in China, the world’s largest commodity consumer; the reversal of capital flows as global monetary conditions tighten; election-related uncertainty in Nigeria; security issues in South Sudan and the Central African Republic; and higher inflation from currency weakness and rising food prices.

China was expected to grow by 7.6% this year, but the bank said this forecast depended on the success of rebalancing efforts. “If a hard landing occurs, the reverberations across Asia would be widely felt.”

The US economy, which contracted in the first quarter owing to severe weather, was expected to grow by 2.1% this year, which also represented a downward revision from the bank’s previous forecast of 2.8%.

World Bank Group president Jim Yong Kim warned that growth rates in the developing world remained too modest “to create the kind of jobs we need to improve the lives of the poorest 40%”.

“Clearly, countries need to move faster and invest more in domestic structural reforms to get broad-based economic growth to levels needed to end extreme poverty in our generation,” Kim argued.

The GEP argued that fiscal policy needed to be tightened in countries where deficits remain large, including Ghana, India, Kenya, Malaysia, and South Africa. “In almost half of developing countries, government deficits exceed 3% of gross domestic product (GDP), while debt-to-GDP ratios have risen by more than ten percentage points since 2007.”

The reports also said vulnerabilities persisted in several countries that combine high inflation and current account deficits, including Brazil, South Africa and Turkey. “The risk here is that the recent easing of international financial conditions will once again serve to boost credit growth, current account deficits and associated vulnerabilities.”

Edited by Creamer Media Reporter

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