Fears of “Ramaphoria” running out of steam are coming to the fore. The high frequency data in Q1 was all pointing to a negative data print, but all market participants held their breath and hoped for the best. Q1 GDP disappointed to mammoth proportions. The disappointment was on multiple levels: a lower than market consensus print, the 3rd negative Q1 print in three years, and worst of all, the worst print in nine years.
Consumers are feeling battered with all the negatives that have hit them so far this year, including the increase in VAT and astronomical fuel price increases, just to name a few. The inability to generate growth for the country has many negative implications.
The rating agencies have paused on downgrades on the sovereign ratings, as they gave the new government time to put in place structural reforms. Should the turnaround fail to materialise, the Moody’s investment grade rating will be under threat and also potential further downgrades from Fitch and S&P which are already below investment grade ratings could ensue.
Furthermore, lower GDP prints will put further pressure on the fiscal balances. The National treasury based their budget assumptions on a growth rate of 1.5%. Inability to achieve that number will mean larger budget shortfalls which will need to be financed.
Last but not least, a low growth environment does not inspire business confidence, particularly in the private sector. Companies need to see the uptick in growth in order for them to start investing more into the economy. A lack of support from the private sector means that job creation will remain sluggish.
While it is easy to get stuck on viewing all the negatives of the -2.2% quarter-on-quarter print and 0.8% year-on-year print, some positivity can be drawn from the numbers.
On the production side of the economy, four out of eleven industries contributed positively to the GDP number. These were Transport (0.1%), Finance (0.2%), Government (0.3%), and Personal services (0.1).
On the expenditure side, there was a little more positivity. Only Gross fixed capital formation and Net exports were negative. This left positives for Household final consumption expenditure (0.9%), Government final consumption expenditure (0.2%), and Inventories (0.1%).
The composition of GDP in Q1 shows tertiary sector is making up the majority of GDP contribution. There is an opportunity for SA to diversify the composition of GDP and reduce reliance on primary and secondary sectors.
There is no easy answer. Economies do not turn around overnight. This notable disappointing GDP number could not come at a worse time for President Ramaphosa, as he tries to rebuild confidence in the economy. SA will need for cyclical growth to plug the hole, while government puts in place structural reforms, which will ultimately deliver the higher, longer-term growth, required to solve the larger issue.
Tsitsi Hatendi-Matika is Head of Retail Investment Specialist at Absa’s Wealth and Investment Management unit.