Devastating ripple effect on the broad South African economy

The strike in the platinum sector has a devastating ripple effect on the broad South African economy. Stats SA last week released results for first quarter GDP growth which slowed to 3.8 %.

This is the first time that the economy contracted since the recession in 2009. Mining output plunged the most in 47 years during the longest industry strike in the nation’s history. On a micro scale, Rustenburg has turned unto a ghost town with local businesses closing down. Over the weekend hungry miners and their families received food parcels from charity organisations.

Economists warn that the country is at risk of another quarter contraction, which will confirm that the economy is in a recession.

It would mean no new capital investment because who is going to put up new factories or infrastructure if the economy is contracting? There would also be a severe slow down or reversal of foreign capital inflows.

This is significant because the country is currently running at a budget deficit and we are living beyond our means, and to offset this, our economy needs foreign capital inflows to sustain itself in the short term. That would ultimately kill the government’s hopes of rapid infrastructure development, while job creation would be delayed for a considerable period of time.

Mining production, which makes up 5% of the GDP, decreased by 4.7% in March, while the mining sector output decreased by nearly a quarter (24.7%).

Most disturbing is the decline in output in the manufacturing sector, which contributes around 15% to the country’s GDP – it contracted by 4%. Industries such as petroleum, basic chemicals and iron ore were affected by the platinum strike.

Wage negotiations in the manufacturing sector are set to take place next month and analysts are expecting them to be ‘antagonistic’ and predict possible strike action, which spells further bad news for the country’s economy. Another strike looms in the metals and engineering sector next month which will have further negative effects of economic growth.

One economist advises companies against investing in new plants, equipment or machinery as businesses will be unlikely to find consumers willing or able to buy the goods they are producing.

Unless you see a dramatic turnaround in the labour sector and government cutting back spending it’s a very murky outlook.

New mineral resources minister Ngoako Ramatlhodi said last week that he wanted to “find a way of facilitating an agreement “to end the strike. The “current system of labour relations has collapsed.”

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