BRICS in Trouble
South African Economy Hits Wall

Brazil and China aren’t the only BRICS having trouble lately. As The Wall Street Journal reports:

[The South African] economy contracted an annualized 1.3% in the second quarter, data released on Tuesday showed, far worse than the 0.6% expansion economists had expected. South Africa’s economy grew by 1.3% in the first quarter.

It was the worst quarterly performance in a year and the second-worst since the global financial crisis. The dip means growth this year will likely fall near the 1.5% mark recorded in 2014.

In South Africa, such tepid growth feels like recession. A quarter of the workforce is unemployed and more than half of people under 25 years old. Widening inequality has driven an increase in crime and violent attacks on shop owners and laborers from poorer African countries. A failing power grid has forced residents of Johannesburg and other cities to adapt to traffic snarled by darkened signals and shops that are closed for lack of light.

The rand is at an all-time low against the dollar, and to make matters worse, many of the tools that government would use to fight these problems are unavailable to Pretoria, or carry significant drawbacks:

The poor growth figures make the conundrum facing South Africa’s central bank even more confounding. The bank wants to raise interest rates to prop up the rand. But tightening credit could freeze up growth even further.

The administration of President Jacob Zuma has demonstrated even deeper policy paralysis, economists say. In the years since the global financial crisis, the government did little to build up financial buffers. External debt has risen steadily, to about 40% of gross domestic product.

South Africa is one of the two biggest economic players in sub-Saharan Africa, and the most stable state in the region. As we’ve written before, it bears watching both as a bellweather and as a bell cow: it will both show where other countries may be headed, and help lead them there. In this case, its economic woes bode ill for it and its neighbors. So if quick fixes from interest rate changes and deficit spending don’t work this time, how can South Africa sort itself out? For an answer to that, keep an eye on TAI for a forthcoming essay from Ann Bernstein, the head of South Africa’s leading market-oriented think tank.

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