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Why Nene thinks the recession can be turned around, and other reactions to SA's economic plunge

| Economic factors

Finance Minister Nhlanhla Nene told reporters in Beijing that government was confident it could turn the economic situation around. He admitted to being surprised by the contraction in the second quarter saying they were not expecting it.

Statistics South Africa revealed on Tuesday, 4 September 2018, that the economy contracted 0.7% in April, May and June and revised its growth downwards for the first quarter to 2.6% putting SA in its first recession since 2009. The news comes just weeks after the announcement at the end of July that unemployment figures had risen to 27.2% in the second quarter. The rand fell more than 3% amid the negative local news on Tuesday and was trading at R15.32 to the greenback at 16:00.

Nene said the reasons for the steep decline of 29% in agriculture was the end of the drought in the Western Cape and consumers having a tough time with petrol price and value added tax (VAT) hikes.

He added that structural reforms are being put in place to reduce the bottlenecks in the economy, such as the finalisation of the Mining Charter and releasing mobile spectrum.

Nene said he understood the impatience of the public and promised that Cabinet would soon announce a reform package to ignite economic growth, while his medium term budget speech in October will address policy issues.

Urgent Parliamentary debate

Meanwhile, Democratic Alliance Leader Mmusi Maimane will write to parliamentary speaker Baleka Mbete on Tuesday, requesting an urgent debate about the recession. The official opposition blamed the poor GDP figures on the “ANC’s mismanagement of the economy", saying that unemployment is at its highest level since 1994, with around 10 million jobless South Africans and the rand at a 27-month low, its weakest level since 2016.

Expropriation without compensation

The Institute of Race Relations (IRR) said that government’s push for expropriation of land without compensation has harmed investor sentiment and hurt the economy.

The IRR pointed to the Stats SA data which found that the sector which saw the biggest drop in the second quarter line was agriculture, forestry, and fishing, with a nearly 30% slide. 

IRR CEO Dr Frans Cronje said anything that undermines economic growth keeps people poor, and expropriation without compensation is increasing poverty while the rand is being punished, driving up the costs of imported goods. The group says it has led a global and domestic lobby against expropriation without compensation to put pressure on government to abandon its plans. 

Strong leadership

The Congress of South African Trade Unions (Cosatu) said it was not shocked by the country falling into a recession as the news "reflects a paralysis in SA economic policy trajectory". Cosatu blamed the rise in VAT, sugar and fuel tax for reducing the money that workers have to spend in the economy. Household final consumption expenditure decreased by 1.3% in the second quarter of 2018. 

Cosatu said the situation called for strong and decisive leadership and an “alternative development strategy” with production of goods primarily aimed at domestic and regional markets with exports playing a secondary role.

The federation said that the increase in government spending in 2009 pulled the country out of recession then and warned against continuing with “austerity measures” it claims the state has undertaken since 2014, to contain the fiscal deficit.

Weak exchange rate biggest challenge to business

The manufacturing sector contracted by 0.3% in the second quarter and the Steel and Engineering Industries Federation of Southern Africa (Seifsa) said the weak rand represented "the biggest challenge to business" in the sector, due to the high cost of imported inputs and increases in fuel prices, determined in part by the rand/dollar exchange rate. 

The industry body said that slowing consumer demand was worrying for manufacturers, while the situation is worsened with low levels of investment. According to Seifsa, the economy “desperately needs a jump-start” and distressed companies should be assisted while policy makers should urgently implement existing policies. 

Commodity boom may be imminent 

The only sectors to record growth in the second quarter of 2018 were the mining industry and the finance, real estate and business services sectors.  T

The Department of Mineral Resources welcomed the announcement that the mining sector grew by 4.9% in the second quarter and contributed 0.4 of a percentage point to GDP growth, led by growth in Platinum Group Metals (PGMs), copper and nickel.

The DMR said this boded well for the industry and a “commodity boom may be imminent” despite weak gold and platinum prices, and plans to lay off thousands of mine workers. 

“Prioritising the exploration of new mineral deposits, and continuing to work together with the industry, we can turn our comparative advantage into competitive advantage, and ensure the sector’s positive contribution to growth of the economy is sustained,” Minister of Mineral Resources Gwede Mantashe said.

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