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SA skirting the path to recession

Economists say SA will likely avoid another slump, but warnings of credit downgrades remain.

Economists say South Africa will likely avoid another slump, but warnings of credit downgrades remain. Picture: stock.xchng.

JOHANNESBURG - Figures released today showed that South Africa's economy experienced its first contraction since the 2009 recession, suffering a quarter-on-quarter drop of 0,6 percent.

The negative growth rate in the first quarter of this year is largely attributed to the massive drop in production on the platinum belt due to the ongoing strike there.

The Association of Mineworkers and Construction Union (Amcu)-led industrial action has entered its fifth month, with workers sticking to their demand for a R12,500 basic salary.

The GDP figures came as a surprise to many economists.

Though many expected a negative trend, the average prediction was that the country would only see a 0,1 percent drop.

Concern is likely to mount now that a full-blown recession could be on its way should the next quarter experience further damage.

"The popular definition of a recession is two quarters of contraction," explains Nedbank Chief Economist Dennis Dykes.

But he says this doesn't seem to be the likely path this time, with economic stagnation far more widespread ahead of the recession.

"It's not a big a contraction compared to what we saw in 2009, so it's not yet as worrying. Nevertheless, it's particularly unwelcome and it does turn the spotlight back on us."

Efficient Group Chief Economist Dawie Roodt agrees that a full recession is fairly unlikely but says that doesn't mean there's no need for concern.

"With a bit of luck, we may see one and a half percent growth for this year," he says.

CREDIT DOWNGRADE?

It's possible to see one percent economic growth, warns Roodt, meaning a credit downgrade is looking increasingly likely for South Africa.

"I'm pretty sure that we're going to see a downgrade in our foreign debt. That will lead to all sorts of bad things; bond market rates going up, the rand probably coming under pressure and the likes."

Currently, South Africa has a BAA1 rating from Moody's, which it dropped to from A3 in 2012.

The current rating, Roodt says, is just two notches up from "junk status".

With anything over one more downgrade, South Africa will be at a point where it can barely borrow capital, leading to an extremely difficult economic climate.

Roodt says this is perhaps the greatest obstacle facing newly-appointed Finance Minister Nhlanhla Nene, who officially replaced Pravin Gordhan on Monday.

Find out more about South Africa's new Cabinet.

Listen to Bruce Whitfield's full interviews with Dykes and Roodt on The Money Show:

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