South Africa’s Economic Growth To Remain Subdued Amid Weak Mining And Manufacturing Activity

South Africa, which is struggling with high inflation and labor unrest, is expected to see subdued growth over the next year. Two separate reports released on Thursday showed weaker-than-expected results in South Africa’s mining activity and factory output in June.

“While South African gross domestic product growth is likely to have accelerated in the second quarter, the bigger picture is that the economy is still subdued by regional standards and by the standards of South Africa’s recent history,” Shilan Shah, Africa economist at Capital Economics in London, said in a note to clients.

The continent’s biggest economy is due to report second-quarter GDP data on Aug. 21.

Economists expect South Africa to expand by 2.2 percent this year, according to a monthly Thomson Reuters polled released on Thursday, but they shaved 0.1 percentage point off their projections for 2014 to 3.0 percent compared with the previous poll. Economists’ projection for 2015 was unchanged from last month’s poll at 3.5 percent.

Inflation pressures have left South African Reserve Bank with little wiggle room to cut borrowing costs and stimulate the economy, which expanded last quarter at the slowest pace since a 2009 recession. The central bank has kept interest rates unchanged at four-decade lows of 5 percent for a year now.

"If, however, inflation remains sticky and evidence emerges of second round effects, the bank would take appropriate measures in keeping with our mandate," Francois Groepe, deputy governor at the Reserve Bank, said last week in a speech posted on the bank's website.

The median forecast for inflation this year in the Reuter’s poll was unchanged from last month's poll at 5.9 percent. The South African Reserve Bank targets inflation of between 3 percent and 6 percent. Economists expect the central bank to keep the repo rate at 5 percent through next year and then raise it by 100 basis points in total in 2015.

Mining

“Output in the mining sector could contract outright in the third quarter,” Shah said. “Work stoppages have intensified in July and August. And there remains the potential for more strike action to follow in the coming weeks as wage negotiations continue to take place.”

Mining output slumped by 6.2 percent in June from the year-ago period, against a consensus estimate of 0.5 percent growth. Mining accounts for between 4 percent and 6 percent of South Africa's GDP.

The decline was led by renewed weakness in the platinum group metals and gold. The 18.9 percent year-over-year drop in PGM output subtracted 4.2 percentage points from the total output figure, while gold subtracted 2.3 percentage points. Negative growth was also observed in other metallic minerals (a decline of 38 percent) and diamonds (a drop of 22.9 percent).

Whilst mining production figures are fairly volatile, the latest figures round out the data for the second quarter and are thus significant, according to Nomvuyo Guma of Standard Bank.

In the three months to June, seasonally adjusted output hardly grew, recording marginal growth of 0.1 percent quarter-on-quarter, compared to the first quarter of this year.

Gold and platinum miners are under particular strain, facing significant cost and demand pressure. “Against the backdrop of softer prices, potentially crippling wage demands and greater electricity supply uncertainty, the outlook for mining production growth this year is very poor,” Guma noted.

Production volumes are on track to decline further this year, following a 3.2 percent year-over-year decline in 2012 relative to 2011. With wage negotiations in the gold mining sector having taken a turn for the worse (a dispute has been declared between employers and unions, and the talks are due to be mediated by the Council for Conciliation, Mediation and Arbitration), the possibility of another bout of damaging strike action this year is a key risk, Guma added.

AngloGold Ashanti Limited (NYSE: AU), Harmony Gold Mining Co. (NYSE: HMY) and Sibanye Gold Ltd (NYSE: SBGL) were downgraded to sell by HSBC Holdings Plc (NYSE: HBC) on Thursday, which said the lower price of the metal is cutting margins at South African miners beset by labor disputes. AngloGold, Harmony and Sibanye were all reduced from hold.

Manufacturing

The weak mining data was followed within a couple of hours by figures for manufacturing output, which showed the sector slowed significantly in June to its weakest pace in more than two years. Manufacturing makes up about 15 percent of the South African economy.

Factory output annual growth slowed to 0.4 percent in June from a 2.1 percent in May. Economists had expected the growth figure to rise to 4.3 percent. The latest growth was the weakest since April 2011. “The latest manufacturing data confirms our view that the underlying momentum in the manufacturing sector is extremely weak,” Guma said.

Although the continued weakness of the rand should provide further relief for local manufacturers, much of South Africa’s manufacturing sector is based on the processing of local commodities, and a constraining of mining due to strike action would in turn weigh on manufacturing production, Shah warned.