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South Africa heading into recession?

South Africa heading into recession?

The country’s economy slowed more than predicted in the first three months of the year, “painting a very bleak picture” for future growth prospects.

Summary:

  • South Africa is on course for its first recession in seven years
  • This week Fitch followed Standard and Poor’s in sparing the country from ‘junk’ status, but the economy shrunk more notably in the first quarter than initially anticipated
  • Market analysts believe the poor performance won’t turn around “anytime soon”

Is the most developed nation in Africa spiralling into a recession?

While South Africa was this week spared ‘junk’ status from two ratings agencies, the country’s economy contracted more than initially predicted in the first quarter of 2016 and is on course for its first recession since 2009.

Year-on-year the economy shrank by 0.2%. Economic output fell by 1.2% in the three months to March, as mining in the country suffered a slide amid poor commodity prices. Ongoing droughts across the south of the continent also had an impact on agriculture in South Africa, one of its key drivers of GDP.

John Ashbourne, Analyst at Capital Economics, said that these latest figures “paint a very bleak picture” of the state of South Africa’s economy, with “little optimism that things will turn around anytime soon”.

In addition Hans Spangenberg, Analyst at NKC African Economics, stated that it now appears that South Africa is “in danger of a possible recession this year”.

On Wednesday (June 8th) Fitch affirmed the country’s investment grade rating. This followed news on Monday (June 6th) that Standard and Poor’s also maintained its rating of BBB-, but warned the government that it will need to implement significant economic reforms if it is to avoid a downgrade later in the year.

Political uncertainty and the devaluation of the rand in international terms has prompted many of South Africa’s investors to seek rand-hedging assets overseas.

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