Economic Growth outperforms Expectations
In a time when good news seems hard to come by, the latest gross domestic product (GDP) results of the South African
economy provide some cautious cheer. The South African economy grew by 1.3% in 2017, exceeding the National Treasury’s expectation of 1.0% growth announced during the National Budget Speech in February.
After a wobbly start to 2017, which saw economic activity contract in the first quarter, the economy saw sustained growth for the remainder of the year.
The fourth quarter experienced the highest growth rate of 2017, with the economy expanding by 3.1% quarter-on-quarter (seasonally adjusted and annualized) following an upwardly revised 2.3 percent rise in the previous period and beating market expectations of 1.8 percent.
It is the strongest growth rate in six quarters, mainly due to a robust gain in agriculture, a rebound in internal trade and a faster increase in manufacturing. GDP Growth Rate in South Africa averaged 2.87 percent from 1993 until 2017, reaching an all-time high of 7.60 percent in the fourth quarter of 1994 and a record low of -6.10 percent in the first quarter of 2009.
A bumper maize crop and recovery in other agricultural commodities saw agriculture production rise by 17.7% in 2017 compared with 2016.
The finance and mining industries also contributed positively to GDP growth in 2017. Mining’s growth was spurred on, in part, by increased production of manganese ore, chrome, and iron ore, according to a recent article by Stats SA. Rising demand for minerals used in the production of steel contributed to these increases.
The trade sector was the second-largest contributor to economic growth in the fourth quarter, mostly a result of a rise in activities related to retail, wholesale and motor trade.
Despite mining’s increase for the year as a whole, the industry saw a quarter-on-quarter decline in the fourth quarter, largely driven by a fall in the production of gold and platinum group metals (PGMs).
Agriculture made the largest upward contribution to GDP growth, up by 37.5 percent, following a 41.1 percent jump in Q3, mainly due to the higher production of animal products. Other positive contributions came from: trade, catering and accommodation (4.8 percent compared to -0.1 percent), namely wholesale, retail and motor trade; manufacturing (4.3 percent compared to 3.7 percent), namely food and beverages, petroleum, chemical products, rubber and plastic products; basic iron and steel, non-ferrous metal products, metal products and machinery.
Also, strong growth was reported for; finance, real estate and business services (2.5 percent compared to 1.9 percent), namely financial intermediation and auxiliary activities; transport, storage and communication (2.8 percent compared to 0.8 percent), namely land freight transportation and communication services; government services (1.4 percent compared to 1.1 percent); and electricity, gas water (3.3 percent compared to -6.1 percent).
On the other hand, the contraction was seen for mining (-4.4 percent compared to 6.2 percent), largely due to lower production of gold and platinum group metals; and construction (-1.4 percent compared to -1.2 percent), due to both residential and non-residential buildings.
Year-on-year, the GDP grew 1.5 percent, following an upwardly revised 1.3 percent growth in Q3 and a beating the forecast of 1.4 percent. It is the highest growth rate since the first quarter of 2015.
Considering full 2017, the GDP advanced 1.3 percent, above 0.6 percent in 2016. A rebound was seen in agriculture, fishing, and forestry (17.7 percent compared to -10.2 percent in 2016) and in mining and quarrying (47.6 percent compared to -4.2 percent).
In contrast, the contraction was observed in trade, catering, and accommodation (-0.6 percent compared to 1.7 percent), manufacturing (-0.2 percent compared to 0.9 percent) and construction (-0.3 percent compared to 1.1 percent).
On the political front, Deputy President Cyril Ramaphosa was elected the new president of the ruling African National Congress (ANC) at the much-anticipated ANC National Conference in mid-December and then became State President on 15 February after Jacob Zuma announced his resignation on television.
The outcome is considered market-friendly, and the rand appreciated notably after the conference. The result prompted economists to revise their economic growth forecasts slightly upwards, as it is believed that positive political change could trigger a much-needed recovery in confidence levels among households, corporates and foreign investors, which will in due time lead to higher spending and renewed interest in investment in South Africa.
Mr. Ramaphosa has already started to take concrete action which has included the replacement of the Board of Directors and CEO at the beleaguered Eskom, and some action from the National Prosecuting Authority’s Asset Forfeiture Unit. This unit, together with the Treasury, is pursuing 17 separate cases of corporate malfeasance by businesses close to Mr. Zuma.
The investigations target some $4.2bn in assets. Then his State of the Nation Address, delivered on 16 February, hit all the right notes on plans to streamline government and address problems in SOEs. These and hopefully more to come in terms of credible plans to revive the economy, including structural reforms, clear policy and regulatory direction, further clean-up actions at mismanaged SOEs, addressing corruption and waste in the economy and stemming the tide in terms of fiscal slippage, would go a long way in convincing the ratings agencies that South Africa’s downward spiral could be turned around. If these developments prevent Moody’s Investors Service from downgrading South Africa’s local-currency debt, South African government bonds will remain part of the Citibank World Government Bond Index.
However, we acknowledge that Mr. Ramaphosa faces an arduous task in his attempts to clean up the deeply corrupted structures of the ruling party and to oversee the prosecution of figures linked to the former president.
These networks are deeply rooted and intertwine with state structures and a governance system in which many corrupt figures are still present, who can be expected to resist and obstruct all attempts to end the practices.
Inflationary pressures eased in the opening months of 2017, consistent with subdued consumer demand, moderating food prices and a strengthening rand. Headline consumer price inflation slowed from a peak of 6.8% y/y in December 2016 to 4.7% y/y in December 2017, averaging 5.3% last year, compared to 6.4% in 2016. We forecast headline CPI inflation to an average of 4.8% and 5.2% in 2018 and 2019, respectively.
Although the CPI outlook remains favorable and signals that there is indeed scope for further monetary policy loosening (there was a 25 basis point cut in the policy rate in July 2017), the South African Reserve Bank (Sarb) opted to remain conservative by maintaining the repo rate at 6.75% at its previous three meetings (in September, November and January).
It remains clear that the Bank does not view monetary policy as the sole solution to the structural growth constraints in the economy, nor does it believe that a reduction in interest rates will provide a significant stimulus to growth in the current environment of low confidence and political uncertainty.
With South African economic growth has exceeded expectations in 2017, all eyes are now on 2018. National Treasury expects growth of 1.5% in 2018. Only time will tell how the economy will fare compared with this forecast.