Slower-than-expected growth in China poses a material external risk to South Africa’s 2013 growth outlook, a leading banking group warned on Monday, while reinforcing the view that the domestic headwinds of policy and labour-market uncertainty remained worrying threats.

Absa Capital, which is affiliated to Barclays, lowered its 2013 gross domestic product (GDP) forecast for South Africa from 2.7% to 2.3%, making it the latest in a number of recent downward revisions for Africa’s largest economy.

Economist Peter Worthington said that recent Chinese economic data pointed to slower growth than had been forecast previously. He even warned of downside risks to the bank’s recently revised 7.4% GDP outlook for the world’s second-largest economy – previously Barclays had forecast that China would expand by 8% in 2013. Overall, the group is forecasting global growth of 3.1% in 2013 and 3.8% in 2014.

China’s official Purchasing Managers’ Index (PMI) dropped to 50.1 in June from 50.8 in May, the index’s lowest level in four months. In addition, a separate PMI produced by HSBC and Markit Economics fell to 48.2, a nine-month low and below the 50 reading, which divides expanding activity from a contraction.

China is South Africa’s largest trading partner and a key buyer of commodities such as platinum-group metals, gold, coal and iron-ore, which together account for 41% of South Africa’s yearly exports.

Its slowdown has been linked with its structural reforms that seek to improve economic efficiency and alter the economy’s investment- and resources-heavy balance in favour of higher contributions from the Chinese consumers.

Worthington said there was a risk that China could slow more rapidly than had been expected, which would have “massive implications for South Africa, because of the impact on commodity prices”.
Besides the weaker PMI, business confidence in China had also deteriorated markedly and had diverged strongly from economies such as the US and Japan, where confidence levels were stronger.

This weakness was likely to weigh on the outlook for the rand and South Africa’s current account performance, owing to the sensitivity of commodity demand and prices to Chinese growth.

“South Africa’s exports are volume constrained in some cases and are experiencing price declines in most cases,” Absa Capital adds, noting that the terms-of-trade were shifting against South Africa – a trend that could intensify in light of China’s performance.

Imports, by contrast, would continue to swell largely as a result of imports associated with the country’s public-sector-led infrastructure programme. The bank estimates that nearly R1.1-trillion would be spent on infrastructure in the coming three years, with Worthington describing it as the “only growth show in town”.

The rand, meanwhile, had entered what the bank’s currency strategist Michael Keenan described as a ‘perfect storm’ of domestic and external factors, with a slowdown in Chinese demand posing a significant downside risk.

“We now find ourselves in a strong-dollar environment, which is unlikely to fade as long as there are heightened expectations that the Federal Reserve is going to scale back on its quantitative easing,” Keenan outlined.

Coupled with domestic issues such as labour-market instability, uncertainty over the future of the National Development Plan and the current account and fiscal deficits, the rand was likely to come under sustained pressure.

Keenan expects the unit to weaken to R10.50 to the dollar in the coming three months, before making a sluggish recovery to around R10 by the second quarter of 2014.