Cape Town – The rand see-sawed backwards heavily on Tuesday after Statistics South Africa revealed the country is in a technical recession for the second time in eight years as gross domestic product (GDP) contracted 0.7% for the first quarter of 2017.
The Madiba-clad currency erased gains made in a strong morning against the dollar, which saw the rand strengthen by 1% at 04:20 to trade at R12.69 to the dollar. By 12:25, it had reversed these gains, dropping 1.4% to trade at R12.89/$.
Yields on rand-denominated government bonds due December 2026 rose 6 basis points to 8.49%, the first increase in five days. The six-member extended declines after the release, dropping 1.7% in Johannesburg.
The contraction follows the GDP decline of 0.3% in the fourth quarter of 2016.
TreasuryOne said the GDP figures came in far lower than their expected 0.7% expansion. The median of 19 economists’ estimates in a Bloomberg survey was for 1% expansion. One economist forecast the contraction.
“There is a risk that these contractions are not over and we could see another negative coming out in the second quarter of this year,” Annabel Bishop, the chief economist at Investec, told Bloomberg by phone from Johannesburg.
Rand Merchant Bank analyst John Cairns said earlier that the bank expected a contraction of 0.2%. “This would imply that the economy was formally in a recession over the turn of the year,” he said in a morning note. “The data is going to confirm that the economy has been really struggling.”
When the rand was at its highest level on Tuesday, Cairns said that while “momentum remains positive into today”, “the rally has probably run itself out: the rand’s outperformance yesterday seems hard to justify and the favourable global backdrop has eased as both EUR/USD and Wall Street stabilise and the environment turns marginally risk-off because of the Qatar issue.”
While rains are helping Africa’s economy recover from a 2015 drought that was the worst since records started more than a century earlier, political uncertainty has hampered implementing reforms aimed at boosting growth. President Jacob Zuma changed his cabinet and fired Pravin Gordhan as finance minister in March, a move that saw the nation lose its investment-grade status with two companies for the first time in 17 years.
SA enters technical recession
In 2016, the economy grew only 0.3% for the year. Compared to the previous year, GDP growth came to 1%. “Over the last four years there were instances of negative economic growth prior to the last ,” said deputy director general of Economic Statistics at Statistics South Africa Joe de Beer.
The main contributors to the contraction were the trade and manufacturing industries. Trade declined 5.9% and manufacturing contracted 3.7%.
The World Bank on Monday reduced its GDP forecast for South Africa in 2017. It said the economy, which grew by 0.5% in 2016 (2017 Budget Review), would not show much improvement with 0.6% growth in 2017 and 1.1% in 2018, before showing more gains in 2019 of 2%. The projections for 2017 and 2018 are 0.5 and 0.7 percentage points less respectively than its January 2017 figures.
The figures paint a far gloomier picture than the South African Reserve Bank’s latest economic projections. It said on May 25 that it had revised growth projections down to 1.0% (2017), 1.5% (2018) and 1.7% (2019).
These figures were lower than the official growth projections revealed in the 2017 Budget Review, which expected growth figures of 1.3% (2017), 2% (2018) and 2.2% (2019).
The Reserve Bank’s reasoning for the lower projections was due to “the expected impact of the sovereign credit ratings downgrade on domestic private sector gross fixed capital formation in particular”. DM