S.A Economy Escapes Recession in Q2 while 2019 Growth is likely to be Anemic at best

S.A Economy Escapes Recession in Q2 while 2019 Growth is likely to be Anemic at best

After shrinking sharply in the first quarter of 2019, the economy rebounded from a low base to record positive growth of 3.1% in the second quarter (April−June). Mining, finance, trade and government services were the main drivers of growth. Three industries (construction, agriculture and transport) registered a slump in production.

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Mining was the strongest performer in the second quarter, expanding by 14.4%. This was the industry’s strongest showing in three years since the second quarter of 2016 when production jumped by 16.3%.

Iron ore, manganese and coal were the main contributors to mining growth. Iron ore production climbed by 11.8% (not annualized) in the second quarter of 2019. Manganese was up by 21.2% (not annualized) and coal by 3.6% (not annualized), according to the Mining: Production and sales release. Gold failed to impress, however, shrinking by 4,1% (not annualized).

Finance, real estate and business services– the largest industry in the South African economy– grew by 4.1%. This was on the back of stronger performances by the banking and insurance sectors.

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Buoyant wholesale, retail and motor trade sales in the South African economy lifted the trade industry by 3.9%.

Government saw its biggest increase since the second quarter of 2014. A rise in contract employment in the public sector, particularly during May’s general elections, underpinned the growth in government activity.

Electricity, gas and water (spurred on by a rise in electricity distributed), manufacturing (driven by higher output in food, transport, and metals & machinery) and personal services were the other three industries that saw positive growth in the second quarter.

Not all industries did well, however. Transport and communication edged lower. Agriculture fell by 4.2% on the back of lower production of field crops and horticultural products.

The construction industry remained firmly in recession, contracting for the fourth quarter in a row. A drop off in activity related to non-residential buildings and construction works constrained growth in the second quarter.

Stats SA also measures the expenditure side of GDP, providing an indication of total spending in the economy. It includes government spending, household spending, investment spending (gross fixed capital formation and changes in inventories), and net exports. Expenditure on GDP in the second quarter increased by 3.0% quarter-on-quarter (seasonally adjusted and annualized), spurred on by a build-up of inventories and increased household expenditure, government spending and investment.

Household consumption expenditure increased by 2.8% in the second quarter, mainly driven by a rise in spending on food and non-alcoholic beverages, as well as recreation and culture. Households held back on eating out and accommodation, however. Spending on restaurants and hotels slipped by 3.8%.

Gross fixed capital formation (fixed investment) increased by 6.1% in the second quarter, driven mostly by increased spending on machinery and transport equipment. This is the first positive rise in gross fixed capital formation since the fourth quarter of 2017. However, activities related to construction works and non-residential buildings were down in the second quarter of 2019.

South African exports of goods and services edged lower (-0.7%), largely influenced by a fall in the trade of pearls, precious and semi-precious stones. In contrast, imports jumped by 18.8% in the second quarter, driven mostly by a rise in trade of machinery and electrical equipment, mineral products and chemical products. 

Key facts from the GDP release for the second quarter of 2019:

  • Real GDP in the second quarter was up 3,1% quarter-on-quarter (seasonally adjusted and annualized).
  • Unadjusted real GDP in the second quarter was up 0,9% year-on-year.
  • Unadjusted nominal GDP in the second quarter of 2019 was estimated at R1,26 trillion, higher than the R1,20 trillion recorded in the first quarter of 2019.

As a result of this pleasant surprise unwrapped by Statistics South Africa (StatsSA), it shows that Q2 rebounded strongly, growing 3.1% against expectations of a 2.4% expansion which was forecast by a Reuters poll. This rebound followed a brutal 3.1% contraction in Q1, triggered in part by excessive load shedding.

This rare piece of good economic news comes against the backdrop of an unemployment rate of 29%, violent xenophobic riots, mounting government debt levels and glaring income disparities which are probably widening. So no one is breaking out the bubbly.

Expectations are that “Q3 will offer some mild growth, but the growth rate we had in Q2 won’t be sustained,” George Glynos, head of research and analytics at ETM Analytics.

Mining had a big rebound after slumping in Q1, partly because of that quarter’s wave of rolling power cuts. Sectors that are growing, such as banking, are unlikely to create huge numbers of jobs.

“While the worst of the load shedding now seems to be behind South Africa, the global backdrop may yet prove to be a hurdle to a full-blown recovery,” said Razia Khan, Standard Chartered Bank’s chief economist for Africa and the Middle East.

There is plenty of evidence that the recovery is fragile at best. South Africa’s trade balance sank unexpectedly into deficit in July, while the August Absa Purchasing Managers’ Index (PMI) highlighted low confidence levels.

Meanwhile, the latest wave of xenophobic violence to rock Johannesburg underscored how unemployment and poverty are helping to fan the flames of social unrest and discontent. Growth for 2019 is likely to be anaemic at best, which will do little to resolve the challenges of joblessness, poverty and inequality that still disfigure South Africa.

In encouraging businesses to borrow and stay afloat, the Reserve Bank’s Monetary Policy Committee (MPC) unanimously decided to keep the main lending rate at 6.5%. The banks’ prime lending rate is thus 10%.

Reserve Bank Governor Lesetja Kganyago made the announcement in the just concluded MPC Meeting. This is the Central Bank’s penultimate announcement for the year. It follows a 25-basis point cut in the July meeting.

It repeated calls for structural reforms to raise potential growth rate, saying weakness in many sectors of the economy remained a cause for concern. Find below the highlights from Kganyago’s speech:

Inflation

“The medium-term inflation outlook is largely unchanged.”

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South Africa Reserve Bank’s (SARB’s) Quarterly Projection Model (QPM) sees headline inflation averaging 4.2% in 2019 (down from 4.4%); 5.1% in 2020 (unchanged); and slightly up to 4.7% (from 4.6%) in 2021. Headline CPI inflation is expected to peak at 5.3% in Q1 2020 and settle at 4.5% in Q4 2021. The forecast for core inflation is lower at 4.3% in 2019 (down from 4.4%), unchanged at 4.7% in 2020 and slightly higher at 4.6% in 2021 (up from 4.5%).

The Bureau for Economic Research’s (BER’s) Q3 survey sees headline inflation down slightly for 2019 at 4.6% (from 4.8%); unchanged at 5% in 2020; and eased from 5.2% to 5.1% for 2021, reaching the lowest levels since 2007.

Growth

“In the second quarter of this year, South Africa‘s GDP rebounded from the contraction experienced in the first quarter, but economic activity levels still remain weak. Based on recent short-term economic indicators for the mining and manufacturing sectors, the third quarter GDP outcome is expected to be muted.”

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Rand

Since the July MPC, the rand has depreciated 4.6% against the US dollar, and by 3% against the euro.

Image 5: Rand vs US dollar over 3 months

“The QPM assesses the rand to remain slightly undervalued. While the rand has benefited from improvements in global sentiment, investors remain concerned about domestic growth prospects and fiscal risks.”

Reaction

Prior to the meeting, analysts generally predicted that rates would be kept steady. However, there was a mixed reaction to the MPC’s decision.

The Steel and Engineering Industries Federation of Southern Africa (Seifsa) Economist Marique Kruger said the decision bodes well for struggling businesses in the metals and engineering (M&E) sector and provides certainty in making key decisions affecting individual cost curves. “The bank’s decision was expected, especially given the current state of the domestic economy, which is in dire need of any kind of boost to ignite business activity.”

Mike Greeff, CEO of Greeff Christies International Real Estate said the MPC’s decision signals that Sarb “is satisfied with the current economic status of the country and is happy to adopt a ‘wait and see’ attitude with regard to balancing the growth of the economy versus keeping inflation under control.

 “The committee’s decision to not meddle with South Africa’s economic status quo should be seen as good news for the real estate sector. There has been some promising growth in the market and while it has not matched the growth of previous years, it is still a positive indicator.”

Samuel Seeff, chairman of the Seeff Property Group found the decision “disappointing”, calling for bold action to stimulate the economy and property market. “We have only had one 25bps rate cut this year (in July) and it is simply not enough. There is ample support for a further rate cut. The second quarter GDP growth of 3.1% was better than expected and inflation, despite slightly up to 4.3% in August, remains fairly benign and well within the bank’s target range of 3% - 6%.

“Simply put, a bold rate cut fuels economic activity as it makes it cheaper for businesses and consumers to borrow. The SA economy is struggling, and sentiment and lack of political confidence in the market remains worryingly low. A cut in the interest rate would assist, especially since business confidence is at its lowest point in 20 years.”

Similarly, Pam Golding CEO Dr. Andrew Golding said while the decision is positive for stability, it’s unlikely to stimulate increased activity in property. “A further interest rate reduction, on the back of the previous cut in July this year, would have collectively provided incentive for favorable buyer decisions.

“What is needed right now is a meaningful confidence boost to offset the global and local macroeconomic and socio-political factors impacting on the market and jump-start the muted economy and create impetus in the property market.”

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