Wednesday, May 28, 2008

Eskom shutdowns slash growth to 6,5 year low

Chalk another one up for the ANC and Eskom. Way to go.

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SA’s economic growth slumped to a 6,5-year low in the first quarter of this year, as power outages led to a sharp contraction in mining output and sharply curbed activity in the key manufacturing sector.

Growth in gross domestic product (GDP) slowed to 2,1% in the first three months of the year — down from 5,3% in the previous quarter and below forecasts of 2,4%, data showed.

The rising cost of credit also knocked growth in financial services, the economy’s biggest sector, down to 4,9% from 8,5% in the fourth quarter of last year.

But the disappointing news from Statistics SA yesterday is unlikely to convince the Reserve Bank not to increase interest rates at its policy meeting next month, because of soaring inflation.

“While weakness in the economy will count for a bit, it is the inflation fears that are overriding,” said Razia Khan, Standard Chartered’s research head for Africa. “We still believe that rates will be hiked by 50 basis points in June, and that may not be it. Further tightening is more likely than not.”

The Bank has already raised lending rates by 4,5 percentage points since June 2006 in a bid to tame inflation fanned by the rising global cost of food, fuel and other commodities.

This has curbed consumer demand, the economy’s main growth engine. But yesterday’s data showed that after slowing for six quarters in a row, the wholesale and retail sector rebounded — rising 3,6% versus 2,1% in the previous quarter, suggesting that retailers may not have been as affected by higher interest rates as most had assumed.

But Joe de Beer, executive manager of national accounts at Stats SA, said the pickup in the sector stemmed mainly from wholesalers. “There is definitely a slowdown in the economy. The two industries that constrained growth were mining and manufacturing,” he said.

The figures provided the first clear evidence of the toll that a five-day power shutdown for SA’s mines in January and a spate of further outages for industry, business and commerce have had on the economy.

Mining output, which makes up 5,4% of GDP, dived 22,1% compared with the final quarter of last year — its sharpest fall in four decades.

Manufacturing output, which accounts for more than 16% of GDP, dipped 1%, but that was partly due to the technical affect of high factory output in the previous quarter.

Economists said the growth outlook for the year would depend on how well the power crisis was dealt with.

The electricity, gas and water sector contracted 6,2% in the first quarter, reflecting the inability of power utility Eskom to meet rising demand.

Nedbank economist Dennis Dykes predicts growth will slow to 2,9% this year, from an average pace of 5% over each of the past four years.

Traders said the GDP figures helped knock the rand 1,2% weaker to R7,78 to the dollar — a one-month low.

The data that analysts focus on measure quarter-on-quarter growth, which is both seasonally adjusted and annualised. But compared with the same quarter last year, the economy grew by an unadjusted 4%, down from 4,6% in the fourth quarter of last year.

The star performers of the economy include construction, which rocketed 14,9% in the first quarter, reflecting a large official infrastructure spending programme over the next few years.

Agriculture leapt 12,5% from the previous quarter, in response to higher crop harvests — spurred partly by the relentless surge in food prices.

Chamber of Mines chief economist Roger Baxter warned that growth prospects for mining and other major industries were likely to remain “constrained” by power limitations during the rest of the year. This was worrying as mining accounted for more than half of SA’s exports, he said.

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