EDITORIAL: Agriculture the star of third-quarter GDP show

In a week in which President Cyril Ramaphosa’s Phala Phala farm has provided much political drama, farming in SA has come along to provide some economic good news.

The volatile agriculture sector accounts for hardly more than 2% of SA’s economy but it provides much more than its fair share of jobs, at about 5.5% of employment. And it can be a huge swing factor in the economy — as it was in the third quarter, when it swung from a contraction of 11% in the second quarter to grow 19% and contribute almost a third of the economy’s surprisingly strong growth for the quarter.

The other big contributor to the much stronger-than-expected 1.6% quarterly jump in GDP was the financial and business services sector. That is by far the economy’s largest sector, at almost a quarter of GDP, so even when it grows fairly modestly, it makes a large contribution, as it did in the latest quarter.

Most other sectors showed some growth too. On a year-on-year basis growth was running at more than 4% in the third quarter, which to a large extent reflects that the same quarter in 2021 was overshadowed by the July riots.

Stats SA looks at GDP from the supply, or production side and from the demand, or expenditure side, and there too the news was encouraging, with exports — including agricultural and mining products — a key driver of the faster-than-expected growth during the quarter.

Economists had been expecting the economy to grow just 0.4% during the quarter. The outcome was a major upside surprise. It shows the economy has at last recovered from the damage done by Covid-19, even if employment is still not quite back at prepandemic levels. And even if the fourth quarter disappoints, the strong third quarter GDP numbers statistically mean a stronger-than-expected outcome for 2022 as a whole, and indeed for 2023.

Economists have been quick to come out with “mechanical upward revisions”, in the words of Goldman Sachs economist Andrew Matheny, who now sees the economy growing at 2.5% this year and 1.6% next, up from previous forecasts of 1.8% and 0.9%, respectively. Matrix Fund Managers economist Carmen Nel notes that even if the economy contracts in the fourth quarter, full-year growth this year is likely to come in at 2%-2.5%.

Spending contracted

The presidency was quick to welcome the good-looking numbers and give the credit to the government’s own economic recovery plan. But there is little evidence that the recovery plan itself has been the driver. And the underlying details of the numbers give little reason for complacency about SA’s growth trajectory.

A first reason for concern is that consumer spending contracted in the third quarter. Consumer spending accounts for more than two-thirds of SA’s economic activity, and it is unusual for it to be in the red. That it was in the latest quarter indicates the strain that households are taking. A big build-up in inventories also suggests that while the production side of the economy picked up quite strongly, this was not matched by higher domestic demand.

Likewise, the investment numbers show a worrying lack of the kind of momentum that could sustain economic growth into the next few years. On the upside, fixed investment has grown for the past four quarters after a long stretch of decline. But the growth has been minimal — just 0.3% in the third quarter, after 0.4% in the second quarter. That does not suggest the government’s much-vaunted reforms have yet prompted the long-awaited boom in investment. And it does not bode well for longer-term growth.

Of concern too are the global headwinds the economy will face next year. Fitch Ratings this week revised its world GDP growth forecast down to just 1.4% for 2023, from the 1.7% it predicted in September. That reflects aggressive action by the world’s central bankers and property sector woes in China.

The weak global picture will inevitably weigh on SA, which will also continue to face domestic electricity and freight constraints, as well as the effect of higher domestic interest rates. The upside third-quarter surprise could provide a confidence boost if markets are not too preoccupied with the past week’s politics. But the underlying growth momentum that SA needs is still not there. And the case to hasten growth-boosting reforms is as strong as before.