R 091355Z MAR 09
FM AMEMBASSY PRETORIA
TO SECSTATE WASHDC 7633
CIMS NTDB WASHDC
INFO SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
DEPT OF COMMERCE WASHDC
DEPT OF TREASURY WASHINGTON DC

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 
---------------------- 
 
¶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 
-------------------------- 
 
¶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 
---------- 
 
¶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.