SOUTH AFRICA'S GDP CONTRACTS AFTER FORTY QUARTERS OF

UNCLAS PRETORIA 000449


DEPT FOR AF/S; AF/EPS; EB/TPP
USDOC FOR 4510/ITA/IEP/ANESA/OA/JDIEMOND
TREASURY FOR DAN PETERS
DEPT PASS USTR FOR WILLIAM JACKSON

E.O. 12958: N/A
TAGS: ECON EFIN EINV EMIN ENRG ETRD BEXP KTDB SF
SUBJECT: SOUTH AFRICA'S GDP CONTRACTS AFTER FORTY QUARTERS OF
POSITIVE GROWTH


1. Summary. South Africa's real GDP contracted by a seasonally
adjusted and annualized rate of 1.8 percent in the fourth quarter of

2008. This was the first quarterly contraction since the third
quarter of 1998. Growth was pulled down by weakness in the
manufacturing; electricity, water and gas; and retail trade sectors.
Growth in the agricultural and construction sectors offset some of
the decline. Most economists expect further economic weakness
during the first half of 2009 given weak domestic demand and
deterioration in the global economy. End Summary

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Fourth Quarter Decline
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2. (U) Statistics South Africa (StatsSA) released the fourth quarter
2008 GDP numbers on February 24, 2009. Real GDP contracted by a
seasonally adjusted and annualized 1.8 percent in the fourth
quarter, down from a 0.2 percent increase in the third quarter. The
fourth quarter GDP performance was the first quarterly contraction
since the third quarter of 1998, when GDP declined by 0.9 percent.
The fourth quarter 2008 decline was mainly due to a contraction in
the manufacturing (-21.8 percent); electricity, water and gas (-2.7
percent); and retail trade (-0.2 percent) sectors; and a sluggish
performance by the mining sector (0.4 percent).


3. (U) Analysts attributed most of the manufacturing weakness to the
deteriorating global economy and the resulting slump in exports. In
addition, local sales were being contained by weak household demand.
Analysts pointed out that the manufacturing sector is now in a
technical recession, following negative growth of 9.4 percent in the
third quarter and 21.8 percent in the fourth quarter. Similarly,
the retail trade sector contracted for the third consecutive
quarter, mainly reflecting the continued impact of weak household
demand. Analysts attributed the sluggish performance by the mining
sector to weak global demand and falling commodity prices and expect
output to remain depressed until global demand recovers.


4. (U) The decline in the electricity, gas and water sector was
caused by a sharp fall in electricity consumption by the mining and
manufacturing sectors. Furthermore, negative feedback effects from
falling manufacturing, mining and retail trade activity were also
evident in the transport, storage and communications sector, which
grew by only 1.8 percent in the fourth quarter, compared to 4.5
percent in the third quarter. This was the weakest performance of
the transport, storage and communications sector since 1998, when
activity in the mining and manufacturing sectors was hit by the
Asian crisis.


5. (U) In contrast, fourth quarter growth in the agricultural sector
increased by an impressive 16.7 percent due to a relative good
planting season and good weather conditions. Likewise, the
construction sector expanded by a strong 10.8 percent, as it
continued to benefit from strong fixed investment activity in
preparation for the 2010 FIFA World Cup, as well as infrastructure
spending by public corporations and the general government.
However, these two sectors together account for only 6.7 percent of
GDP. [Note: The SAG plans to spend R787 billion (about $78 billion)
on infrastructure over the next three years. End Comment] Growth in
the financial services sector, the largest sector of the economy,
Qthe financial services sector, the largest sector of the economy,
was 3.0 percent, confirming that South Africa's financial sector
remains healthy relative to financial sectors elsewhere.


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Local Reaction and Outlook
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6. (U) An ABSA Economist told Embassy Economic Specialist that, "The
figure was worse than expected." He pointed out that recovery in
South Africa will primarily depend on the recovery in the global
economy. A Nedbank economist expects GDP to contract further in the
first quarter of 2009. However, she expects a mild recovery in the
second half of 2009 as infrastructure spending continues and
household demand starts to improve in the wake of lower interest
rates and more manageable debt levels. Finance Minister Trevor
Manuel predicted in his February-budget speech that GDP would grow
by 1.2 percent in 2009. However, most economists expect growth of
less than 1 percent for 2009. Some even predict negative growth.

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Employment
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7. (U) The decline in economic activity in the fourth quarter, as
well as reports of companies cutting costs by reducing their
workforces, was not reflected in StatsSA's quarterly labor force
survey, which showed that the unemployment rate declined to 21.9
percent in the fourth quarter from 23.2 percent in the third
quarter. The total number of individuals employed increased by
189,000 in the fourth quarter. Analyst found the outcome surprising
and not sustainable in the current economic environment. Most
analysts expect job losses to increase in 2009 as the economy
continues to slow. [Note: Much of the fourth quarter employment
increase was in the construction sector. Private sector contacts
have told post that many mining and manufacturing firms are
reluctant to lay off workers until they have a better idea of the
duration of the downturn. This labor hoarding, in a skills shortage
environment, has caused the expected decline in employment to fall
behind the decline in GDP. End Note.]

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Comment
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8. (U) Fourth quarter GDP data confirms that the economy is weak and
suggests that South Africa will slip into a technical recession if
first quarter 2009 growth is also negative. The slowdown is broad
based and likely to continue given the weak domestic demand and
continuing deterioration in the global economy. The looming
technical recession is unlikely to favor employment creation.
However, lower interest rates should counter the economic slowdown
and might restore growth in the second half of 2009.