South Africa travels the road to recession with fellow African economic powerhouse Nigeria

Hopes raised about the South African economy when ratings agency Fitch affirmed the country’s investment grade credit rating are gone now, as data from Statistics South Africa showed the continent’s most advanced economy contracted more than expected in the first quarter of 2016. This is coming weeks after data by the National Bureau of Statistics in Nigeria showed that Africa’s largest economy contracted by 0.36 percent in the first quarter. Nigeria and South Africa are the continent’s two biggest economies, accounting for nearly 40 percent of its GDP.

The South African economy shrank by 0.2 percent year-on-year basis in the first quarter, compared with 0.6 percent growth in the previous three months, according to Statistics South Africa.

The agency said economic output fell by 1.2 percent in the first quarter of 2016 after rising by a revised 0.4 percent in the three months to December, mainly due to an 18-percent slump in the mining sector during the quarter. Mining contributes nearly 8 percent to South Africa’s GDP but the sector has been hit by weak commodity prices. El-Nino exacerbated drought has also affected Agriculture, which accounts for 2.2 percent of GDP. The sector fell 6.5 percent in the first quarter of 2016.

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Thea Fourie, senior economist at IHS Global Insight had in an analysis released in May said weak GDP growth numbers in the first quarter could push South Africa into recessionary conditions much sooner than IHS initially projected.

“Growth momentum is unlikely to show any turnaround in the near term,” IHS stated. “Consumer spending, accounting for more than 60 percent of GDP, is highly unlikely to improve. A higher interest rate burden, a larger tax obligation since no provision was made for fiscal drag in the latest budget, ongoing price pressures for essential non-substitutable goods such as food, and a challenging jobs market set the stage for significantly weaker consumer spending during 2016.”

The central bank forecasts growth at 0.6 percent this year, inhibiting its scope to raise interests to tame rising inflation due to a weaker rand and rising food prices. The South African Reserve Bank gradually raised interest rates by a cumulative 200 basis points since July 2014, in a bid to balance the need to fight price pressures with that of protecting the economy. Now, governor of the apex bank, Lesetja Kganyago seems to have given up, saying recently that the country’s economic prospects do not look promising.

What Kganyago suggests, are urgent structural reforms which he said are needed to boost productivity. Otherwise, South Africa is in great danger of a possible recession this year.

Like South Africa, Nigeria is also not far from recession. The West African country has had revenues hit by the slump in global oil prices. When it looked like it could recover a bit as a result of oil price rebound, new militants emerged in its Delta, blowing up oil installations and crippling production of crude in Nigeria. The country has lost more than 800,000 barrels per day since the attacks started. Other issues relating to the currency also persist.

As things stand, Africa’s two biggest economies may be headed for recession. In a more integrated region, this may be doom, but in a continent that hardly trades with itself, growth in other countries are largely independent of what happens in South Africa or Nigeria.

Regardless of contraction in the Nigerian and South African economies, the African Development Bank (AfDB) insists Africa’s economy will grow by 3.7 percent this year and 4.5 percent in 2017, but adds that this will depend on the strengthening of private investment and consumption.