Recession threatens South African economy

Recession threatens South African economy

09-09-2009 16:34

The South African economy is threatened by deindustrialization as the worldwide recession and a rebounding Rand already weaken companies that are already affected by high wage expenses and suffer from a lack of skilled workers. On September 10, a government report will be released that will demonstrate a 16.4% decline in industry in July from the corresponding period of the previous year. Rob Davies, South Africa’s trade minister, commented on June 30 that the nation could lose much of its industry base and tens of thousands of jobs.

Rand up

Since March 5 the South African Rand rose 41% versus the US Dollar and a decline in international demand has compelled a lot of companies to lay off employees and reduce production. The contribution of industry dropped to 14% in the second quarter of this year, in comparison with 17% in 2003 and could continue to fall.

South African economy

The South African economy suffered its initial slump in 17 years as it contracted by 3% in the second quarter, mainly caused by industry, while the gross domestic product declined during the last three quarters. Manufacturing shrank on a yearly basis 10.9% in the second quarter, as it contracted by a record 22.1% in the first three months of this year, reported the statistics office on August 18.

Recession threatens

Ebrahim Patel, minister of economic development, stated on August 20: “The global economic crunch and the regional slump menaces our economic gains. We are extremely worried that the plunge in manufacturing capacity will last as plants shut down rather than decreasing production.”

Rising labor costs

Even before the financial crunch, the South African economy faced difficult times. Reports by the World Bank demonstrate that labor legislation, which is a hindrance for dismissing employees, increases costs. The administration also believes that skills shortages, such as technicians and engineers, also increase labor costs and frustrate the economy to expand at a faster pace.

Support ahead

Dave Mohr, head economist at Citadel Investment Services, commented: “It’s alarming that the South African economy consists for less than 15% of manufacturing, at its phase of development. The administration is worried that declining employment will undershoot its target to reduce the jobless rate to 14% in 2014, while the current unemployment rate is at 23.6%. Jacob Zuma, the South African president, stated on August 5 that the administration will aside 2.4 billion Rand ($312 million) for companies to finance the education of low-wage employees instead of sacking them. Davies has also promised to provide more funds to suffering companies.
Industrial Development Corporation (IDC), a self-financing, national development finance institution, has reserved 6.1 billion Rand for the next two years to support companies to recover from the economic slump.