The strike that could bring SA to its knees

South Africa's stuttering economy is taking another big knock from a strike by its largest union, which began on Tuesday and could have an even more severe impact than the stoppage in the platinum industry that lasted five-and-a-half months.

Moody's ratings agency issued a stern warning on Thursday of the consequences of the strike by the National Union of Metalworkers of SA (Numsa), which has more than 220000 members in a sector accounting for 15% of the economy - three times the size of mining.

"Numsa's new labour action risks paralysing nearly one- third of the manufacturing sector and wreaking further damage on both South Africa's economy and its already deteriorating reputation among investors," Moody's said.

"The ongoing strike activity leaves South Africa unable to take advantage of the recent pick-up in growth among its major trading partners, consigning it to a third year running of sub-par growth and posing risks for stabilising its government debt metrics, a credit negative."

Moody's remarks suggest it will certainly downgrade South Africa, given the negative outlook it already has on the country's sovereign credit rating.

This also flags the fact that the fractious labour market is further weakening an economy already battling with tepid consumer demand, low business confidence and rising inflation - which is likely to trigger more interest-rate hikes from Gill Marcus' Reserve Bank this year.

The Numsa strike could affect 10500 companies in a range of industries. Moody's says it threatens to shut down production and exports of iron and steel, cars and automotive parts, and consumer durables.

The Steel and Industries Federation of South Africa has estimated the potential daily cost of the strike at R300-million.

Manufacturing production fell in the first quarter of the year, contributing to a 0.6% contraction in the economy, the first since the recession in 2009.

"We believe that manufacturing is basically in recession - we're going to see a significant decline in the second quarter of the year as well. The outcome for the third quarter depends on how long the Numsa strike carries on," said Coenraad Bezuidenhout , executive director of the Manufacturing Circle, which is an industry body.

Confidence within the manu-facturing sector, already affected by the platinum strike, slumped to 25 index points in the second quarter of this year from 41 points in the first quarter, according to the Bureau for Economic Research - the lowest level since 2009.

"The key issue is the timing of the Numsa strike and its consequences, which risk putting the economy in a very difficult predicament right now," said Neren Rau, chief executive of the South African Chamber of Commerce and Industry.

"The labour protests are making CEOs look at the short term, not the long term, which is dangerous for business and the economy. They tend to miss global opportunity without a ... long-term perspective."

Alarmingly, the Numsa strike has disrupted construction at the Medupi and Kusile power stations. Electricity shortages are a main constraint to growth.

To make matters worse, the Treasury warned on Wednesday that the outcome of public-sector pay negotiations due to start later this year was the most significant risk to government finances.

Labour consultant Andrew Levy does not foresee a widespread strike in the public sector, but believes that isolated unions - those of teachers and nurses - could go on strike.

The outcome of the platinum strike is encouraging other unions to seek double-digit pay increases. Numsa is demanding a 15% pay rise in a one-year bargaining agreement - which means the same thing could happen next year.

Last year Numsa spearheaded a six-week strike in the automotive industry which cost the economy an estimated R20-billion and prompted BMW and Nissan to decide against expanding in the country.

"Clearly the bigger effect of the strikes in the long term is the impact on foreign investor confidence and investor confidence generally," said Nedbank economist Dennis Dykes.

The Treasury has hinted that it may have to raise taxes if it has to spend more on public wages, which already account for 40% of official noninterest spending - almost double the emerging-market average.

Meanwhile about 2000 workers affiliated with the National Union of Mineworkers (NUM) went on strike at Impala Platinum's Marula mine on Friday demanding higher wages, a company spokesman said.

" We are talking to the union and the workers and trying to resolve it," spokesman Johan Theron said.

A NUM spokesman in Limpopo, William Mabapa, said the union had not called a strike, but he acknowledged some miners had not gone to work because of what he called "intimidation" by other workers. He declined to elaborate. Theron said management had not received any formal demands. "It does seem like this is in relation with the AMCU settlement and they are unhappy with the wage deal that they got last year," he added.

- Additional reporting Reuters