The SA economy is in far worse shape than most people realised.
News that growth contracted again in the second quarter, tipping the economy into recession, has shocked the markets: most participants were expecting a mild rebound.
Coming on top of the collapse in the manufacturing purchasing managers index (PMI) from 51 to 43 index points, and other poor third-quarter data, SA’s economic outlook has darkened considerably. The rand has weakened to well over R15/$ in response.
This is the first time since 2009 that SA has entered a recession — something that may shred confidence in President Cyril Ramaphosa’s ability to lead an economic revival.
"SA will have to try harder to achieve positive growth [now]," says Standard Chartered chief economist Razia Khan. "Positive political change on its own is not going to be sufficient."
Disappointing GDP growth will have a knock-on effect on the national budget through weaker tax revenue collection. Further fiscal slippage in 2018/2019 now appears inevitable, which will put SA back in the ratings agencies’ crosshairs.
It will also complicate monetary policy by making it harder for the SA Reserve Bank to raise interest rates, even though this may be necessary to stave off emerging-market contagion and shore up the rand.
Before the GDP data, the Reuters consensus was for growth to average 1.4% this year. Economists will now revise down their growth forecasts swiftly, with the consensus likely to fall to 1% — or even lower.
"There is [hardly any] way of sugar-coating the first-half GDP performance," says BNP Paribas economist Jeffrey Schultz, noting that there was weakness across nearly all sectors of the economy.
Overall, real GDP growth contracted by 0.7% quarter on quarter (q/q) in the second quarter against expectations that the economy would pick up to 0.6% q/q after its disastrous first-quarter performance. To make matters worse, first-quarter growth has been revised down from -2.2% to -2.6%.
"While positive contributions were made from mining (up 4.9% q/q) and finance, real estate and business services (up 1.9% q/q), these remain tepid at best and don’t particularly instill confidence that the economy is on a rapid road to recovery," adds Schultz.
Agriculture is the big culprit once again. In the first quarter it contracted by 24.2% q/q (revised to -33.6% q/q). At the time this was attributed to the high base established in early 2017 as the sector rebounded after the drought. However, in the second quarter, agriculture contracted as steeply — by almost 30% q/q.
Unless this is entirely due to the Western Cape’s water crisis, something else must be dragging the sector down. Several economists are blaming the ANC’s decision to expropriate land without compensation. If this is so, agriculture is likely to exert a steep drag on SA’s overall growth rate for the foreseeable future.
"Unfortunately, there are no quick wins here and we expect that ambiguity on this key policy item is likely until at least after next year’s general elections," says Schultz.
SA’s weak investment prospects were highlighted by the fact that gross domestic fixed investment shrank by 0.5% q/q as firms cooled spending on machinery and equipment. The consumer has also cut back sharply, especially on clothing, transport and recreation. This is most likely as a result of hikes in VAT, fuel taxes and petrol prices and the soft labour market.
In total, household consumption shrank by 1.3% q/q, following downwardly revised growth of 1% q/q in the first quarter.
The only positive news was that mining output rose for the first time in three quarters while the slump in manufacturing and exports eased significantly.
Net trade was the most positive driver of second-quarter growth, though the softness in imports is also indicative of waning domestic activity.