S.Africa’s economy contracts, weakens case for rate hikes

PRETORIA (Reuters) – South Africa’s economy contracted for the first time in more than a year during the second quarter of 2015, signalling continued strain that could inhibit the central bank from raising interest rates further.

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johannesburg

Johannesburg

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Gross domestic product in Africa’s most industrialised economy declined by 1.3 percent in the second quarter after rising 1.3 percent in the first three months of the year, Statistics South Africa said.

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This was the first quarter-on-quarter decline in Africa’s most advanced economy since the first three months of 2014, and was far below the most pessimistic forecast in a Reuters survey of economists..

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“An awful … print that will consolidate a lot of the bearishness around the economy right now, and likely exert a weakening influence on the rand at a time of intense market volatility,” Standard Chartered economist Razia Khan said.

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The rand currency strengthened against the dollar despite the data, helped mainly by an interest rate cut in China and recovering from a heavy bout of selling in the previous session that had pushed it to historical lows.

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The local unit has shed nearly 15 percent of its value against the dollar this year, pressured like other commodity currencies by slowing growth in the world’s second largest economy, as well as expectations that U.S. rates will soon rise.

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Analysts said the latest economic data could restrain South Africa’s own policymakers from hiking interest rates further after a 25 basis point increment in July, despite inflation pressures posed by the weaker rand.

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“In such an environment we struggle to see the Reserve Bank justifying another 25 basis point rate hike at its September meeting,” BNP Paribas Cadiz Securities economist Jeffrey Schultz said.

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“For the moment we continue to pencil in one more 25 bp (basis point) rate hike in November, but acknowledge that the risk of further normalisation being pushed out to next year has increased.”

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Manufacturing output, which accounts for about 13 percent of GDP, tumbled 17.4 percent during the quarter, while mining was down 6.8 percent.

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On a year-on-year basis, the economy expanded by 1.2 percent in the second quarter, compared with growth of 2.1 percent in the previous three months.

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