SA Reserve Bank warns of extended slowdown

South Africa’s economic indicators have weakened sharply, “almost guaranteeing” another contraction in the first quarter of 2009, the central bank’s chief economist said on Thursday.
Africa’s biggest economy has been hit hard by a global downturn, with output shrinking 1.8% in the fourth quarter of 2008. Another quarterly decline will tip South Africa’s economy into its first recession in 17 years, Reuters warns.
Chief Economist Monde Mnyande, a member of the Reserve Bank’s monetary policy committee that meets next week on interest rates, said in a speech posted on the central bank website the trend pointed to a continued slowdown in aggregate economic activity this year.
“The short-term, miscellaneous business cycle indicators have weakened significantly in the most recent months, almost guaranteeing a further contraction in the first quarter of this year,” he said.
A fall in real disposable income in the last quarter of 2008 had visibly dampened household spending, Mnyande said.
The central bank is expected to reduce its repo rate by 100 basis points to 8.5% on April 29, adding to 250 basis points in cuts since December aimed at reinvigorating the domestic economy and stave off a deep recession.
While expected to ease more, targeted inflation remains outside the bank’s 3-6% band, suggesting an increasing focus on growth worries.
The weak activity of the final months of last year has deteriorated in 2009, highlighted by a record 15% year-on-year fall in manufacturing production in February as trading partners’ soft economies cut into demand.
Mining output is also shrinking and retail sales fell surprisingly in February.
Credit ratings agency Fitch Ratings said the global downturn was having an increasingly negative impact on the demand for local manufactured goods, leading to possible corporate downgrades.
“When you combine the negative trends in published manufacturing data and GDP forecasts with the expected adverse impact on manufacturers’ credit metrics … further corporate downgrades seem probable in the short to medium term,” said Raymond Hill, head of Fitch’s Emerging Markets Corporate team.
Auto component and vehicle producers as well as iron and steel manufacturers were most at risk, he said in a report.
Mnyande defended the bank’s inflation-targeting framework, but noted that the intensity of the global financial crisis was forcing central banks to reconsider the links between financial stability and monetary policy.
The issue had been discussed extensively at a recent senior management strategy meeting of South Africa’s central bank.
“Evidence presented at the meeting seems to suggest that there is a strong likelihood of some profound changes in the roles and responsibilities entrusted to central banks, regarding the stability of the financial system.”
The success of inflation targeting was dependent on financial system stability, he said.
The central bank has jealously guarded its independence in the face of criticism from the ruling African National Congress’ (ANC) trade union allies, who have demanded inflation targets be scrapped.
Mnyande said although the deficit on the current account had narrowed in the fourth quarter of 2008, data for January and February suggested the trade shortfall may have widened again.
“In addition, the financing of the current account deficit remains a challenge considering the contraction in cross-border lending in an environment characterized by uncertainty in global financial markets,” he said.
The gap on the current account dipped to 5.8% of GDP in the fourth quarter, from 7.9% previously, but the January trade deficit jumped to a record 17.4 billion rand ($1.95 billion).