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Business

South Africa's economy slumps in first quarter

Africa's third largest economy was hit by a sharp downturn in early 2016 amid runaway inflation, a depreciation of the country's currency and massive mining strikes. Political woes have made matters even worse.

Between January and March, the South African economy shrunk 1.2 percent compared with the final quarter of 2015, in a surprisingly sharp downturn for Africa's most industrialized nation, official statistics showed Wednesday.

In a year-on-year comparison, gross domestic product (GDP) dipped 0.2 percent, according to data released by the country's statistics office, Statistics South Africa.

In a statement, Statistics South Africa said the main contributors to the surprisingly sharp downturn were "the mining and quarrying industry and the transport, storage and communication industry."

Mining and quarrying - which contribute around eight percent to the country's GPD - fell by 18.1 percent in the last quarter, due to lower production of platinum and iron ore. The agriculture and fishing industry declined 6.5 percent due to low production induced by the drought that has hit much of southern Africa.

Between 2004 and 2007, South Africa expanded by an average of five percent, but growth has recently been slowed by weak international commodity prices and the economic slowdown in China. Nevertheless, most economists were surprised by how deeply the economy slumped at the beginning of 2016.

"This is weakest growth recorded since the second quarter of 2015 and it does increase the likelihood that a recession will be recorded this year," Laura Campbell, economist at South African think tank Econometrix, told the news agency AFP.

Nedbank, one of the country's leading banks, said in a note to investors that South Africa's economic outlook "remains relatively bleak." Apart from the global commodities slum, it blames rising production costs and the country's limited economic infrastructure for the downturn.

Noting that the economy will continue to struggle throughout 2016, it nevertheless expects the country to bounce back with about one percent growth next year.

Watch video 01:39

Drought crisis in southern Africa

Grim economic data

The dismal growth data have been accompanied by high inflation of more than six percent. The country's central bank in March made a vain attempt at keeping inflation below that mark, raising the key interest rate to a six-year-high of seven percent.

However, inflationary pressures have continued to build, with the depreciation of the rand and the worst drought in a century pushing up food prices.

As a result, the country just narrowly avoided a downgrade of its credit rating recently, when S&P Global-Ratings and Fitch Ratings kept South African debt at the lowest investment-grade level, while still warning that it could cut its ratings later this year.

A downgrade would likely prompt massive selling of South African bonds and further damper already low investor confidence in the government of President Jacob Zuma.

Zuma's surprise sacking of finance minister Nhlanhla Nene in December caused the rand to fall sharply against the US dollar. The president's tense relations with current finance minister Pravin Gordhan, who is seen as trying to tackle corruption and wasteful expenditure, have also shaken investors.

uhe/jtm (AFP, Reuters)

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