South Africa Economy Shrinks as Election Uncertainty Festers

(Bloomberg) -- South Africa’s economy will likely remain weak in the second quarter after unexpectedly contracting in the prior three months as election jitters weigh on demand.

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Gross domestic product fell 0.1% in the three months through March, compared with revised growth of 0.3% in the prior quarter, Statistics South Africa said in a report released in the capital, Pretoria, on Tuesday. Only two of 11 economists in a Bloomberg survey expected the contraction.

The rand traded 0.9% weaker at 18.6883 per US dollar as of 1 p.m. in Johannesburg.

The slump was largely due to contractions in the mining, manufacturing and construction sectors, which make up more than a fifth of GDP, as weak demand and a pickup in rotational power cuts took a toll.

The mining and quarrying sector contribution to GDP fell by 25 billion rand ($1.3 billion) to 100 billion rand and manufacturing’s by 26 billion rand to 217 billion rand in the quarter, Statistician General Risenga Maluleke said.

While the second quarter may see some improvements on the back of a reduction in congestion at South Africa’s ports, improved electricity capacity and a lift in global commodity prices “a lot depends on the politics and what type of alliances we see,” Annabel Bishop, chief economist at Investec Bank Ltd., said.

Early economic indicators show election uncertainty sapped demand in sectors from manufacturing to retail.

Results declared Sunday showed the African National Congress lost its parliamentary majority in May 29 elections for the first time since taking power in 1994.

The ANC is now in talks with opposition parties to form a coalition government, stoking uncertainty as business and investors wait to see who it does a deal with.

President Cyril Ramaphosa’s allies want the ANC to align with the centrist Democratic Alliance while his detractors favor a partnership with the leftist Economic Freedom Fighters or the newly formed uMkhonto weSizwe Party, led by former President Jacob Zuma.

According to Bloomberg Economics, an ANC-DA tie up would see investment pick up, supporting quicker growth and job creation. One with the MKP or EFF will initially hurt investor sentiment as they wait for policy clarity. Adopting looser fiscal policy under an ANC-EFF-MKP administration would drive borrowing costs up, slow economic growth and add to the deficit and debt burden, Bloomberg Economics said.

Household spending, which comprises about two-thirds of GDP, fell 0.3% in the first quarter and continues to face pressure from persistently high interest rates.

(Updates with more details throughout. An earlier version corrected household spending figure in final paragraph)

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