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GDP figure worse than expected

It will exacerbate the headwinds already confronting the economy – Russell Lamberti (ETM Analytics) & Martin Kingston (Busa).

SIKI MGABADELI:  We are officially in a technical recession. That’s two consecutive quarters of negative growth. Stats SA released GDP data today showing that in Quarter 1 the economy contracted by 0.7% after a 0.3% contraction in Quarter 4 of 2016. Lat year the economy grew only 0.3% for the year.

Many economists that I’ve spoken to and all the predictions had expected that the economy would grow in the first quarter due to some positive signs that we’ve seen in the agriculture and mining sectors – also some positive turnarounds and confidence indices throughout the past few months. We know those two sectors, agriculture and mining, did make a positive contribution in the first quarter, but clearly not enough.

Read: SA economy back in recession

Let’s chat to Russell Lamberti, who is head strategist at ETM Analytics, and then by Martin Kingston, who is deputy president of Business Unity South Africa.

Russell, let me start with you. Did you also expect growth in Quarter 1?

RUSSELL LAMBERTI:  Hi, Siki, it’s good to speak with you. I’m a bit surprised by the softness of GDP. I certainly was not expecting a rollicking strong growth, but I did think it would pick up a little bit stronger.

In the grand scheme of things, given the statistical margin at Stats SA, when it comes to measuring GDP I don’t think the story has really changed. I think we are still essentially in a stagnating economy. Whether we are 0.5% up or 0.5% down doesn’t really make a huge amount of difference in the big picture. The economy hasn’t really grown in two years, and that’s kid of remains the takeaway.

But I was a little surprised at the softness. Just given some of the underlying cyclical dynamics recently and some of the pickup in certain confidence indices, as you said, I’d be surprised if the next quarter stayed weak. I think we’ll probably get a bit of a lift in the next few months, but nothing to get too excited about either way.

SIKI MGABADELI:  What are the implications, though, of this softness?

RUSSELL LAMBERTI:  Oh, well, I think the implications are structural rather than anything to focus on in the immediate term. The bigger picture, as I said, is that our economy hasn’t really grown for two or three years now. And, if you take it back to 2008, if you look at GDP in per-capita terms, we are just an incredibly stagnant economy. There is no growth happening. When you get 1 or 2% GDP growth in a R4 trillion economy, that starts adding R40 to R80 billion of new economic activity every year, and that’s even low growth. But just that helps people. It helps employment, it helps activity and sales. So we are losing out on R50 to R100bn new activity and  just stagnating, instead of growing roughly around the global average. We are just continuing to fall behind our global competitors every day, every month.

SIKI MGABADELI:  We are going to be talking to Martin Kingston of Busa in a moment, but another concern is that gross fixed capital formation is only growing by 1%.

RUSSELL LAMBERTI:  The investment picture is poor, and particularly if you look at private-sector investment, which ultimately is the one you want to see picking up. The can can’t be carried by government’s investment side. Private-sector investment is weak. It weakened really sharply after the Nenegate scandal in late 2015/16, and unfortunately the private sector is not confident enough in the socio-political dynamics in South Africa right now to properly commit capital to projects again in a meaningful way. So I think we are stuck with this until we get some better action on the political side of the economy.

SIKI MGABADELI:  And consumers also clearly didn’t come to the party, if you look at the expenditure on GDP contracting by 0.8%.

RUSSELL LAMBERTI:  They didn’t, and I think we saw a little glimpse of what was to come perhaps in the jobs data. The employment data was really weak and that maybe gave the clue as to how weak GDP data was going to be. We can see it in the credit numbers. Consumer credit is slowing. But that’s not altogether bad news, because people are starting to deleverage, households are starting to restore their credit health a little, their financial health. So I don’t think it’s all bad news.

The soft consumer spending in an economy where we know we’ve suffered from over-consumption and reckless spending at times in the past is not all bad news. Again, it might set us up for some better quarters later this year.

SIKI MGABADELI:  Right, we’ll leave it there. Thanks Russell. Russell Lamberti is head strategist at ETM Analytics.

We’ll bring in Martin Kingston now, deputy president of Busa. Martin, let’s start with your reaction to the numbers.

MARTIN KINGSTON:  Well, Siki, we are all concerned and I think surprised. It would be fair to say that consensus was that we wouldn’t see contraction. It does fundamentally exacerbate headwinds that were already confronting the economy and, I would have to say, were undermining business confidence.

SIKI MGABADELI:  Well, as Russell pointed out, this is a fundamentally structural issue. Are we dealing with the structural adjustment requirements that this economy needs?

MARTIN KINGSTON:  No we are not. Business has made it very clear that we need to have a much more aggressive approach to dealing with many of the fundamentals that South Africa is at break on economic growth. That includes better regulation, it includes more efficient and competently run state-owned enterprises, an accountable and transparent public sector and most of all the ability for business and government to work together hand-in-glove in achieving the potential for the economy.

Now what happens when we see this type of statistic emerging is that it confirms our worst fears, which is that unless we are able to address those issues we will continue to underperform. The rating agencies, which have indicated that GDP growth is a critical criterion they are going to focus on, will be further alerted to low-growth prospects in the short to medium term.

SIKI MGABADELI:  Is there an investment strike by business?

MARTIN KINGSTON:  No, there is not an investment strike. It’s very clear that the private sector continues to be still the biggest single investor in capital stock in the country. But it’s understandable that people are cautious about making long-term commitments to fixed investment until such time as clarity, predictability and consistency of both regulation and implementation of appropriate policies. And the political uncertainty that has been referred to exacerbates those concerns and inflames people’s anxieties which already are heightened.

SIKI MGABADELI:  We’ll leave it there. Thanks for your time. Martin Kingston is deputy president of Business Unity South Africa.

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