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A glimmer of good news, but no cigars yet

GDP surprises with 2% expansion.

South Africa’s third quarter GDP expanded by 2% quarter on quarter (q/q), ahead of most economist’s expectations. While this figure is below second quarter growth of 2.8%, there are a few reasons for optimism.

Growth was almost entirely driven by the agriculture, mining and manufacturing sectors. In particular agriculture, which is recovering from the drought of 2016, expanded by a hefty 44.2% q/q thanks to record maize and soybean harvests.

While the sector is expected to show continued growth, it will be at more moderate levels and thus is unlikely to contribute to further significant jumps in GDP growth. 

More interesting is the growth in mining and manufacturing, at 6.6% q/q and 4.3% respectively.

“Globally economies are growing, supporting a recovery in commodity prices,” says Sam Rolland, an economist with Econometrix. “In the first two quarters of 2017 we saw mining companies dispose of excess inventory, with the result that mining production is slowly increasing. An increase in mining activity boosts downstream growth in manufacturing.”

Activity in the utilities (-5.5% q/q) and construction (-1.1% q/q) sectors remain in the doldrums on the back of weak electricity demand and a dearth of sustained fixed investment, says FNB. Nevertheless, gross fixed capital formation (the increase in physical assets) jumped 4.3% in the quarter, supported by a growth in transport equipment, machinery and other equipment.

The biggest downside surprise was a –0.4% q/q contraction in the trade, catering and accommodation sector. However Rolland argues that once again within the sector there are pockets of growth, with companies offloading excess inventory as demand allows. “We are seeing activity going on in the trade sector, and one must look deeper into the numbers to see the real story, it’s a story of an economy showing a glimmer of life.”

This is supported by the fact that household consumption expenditure jumped 2.6% q/q in 3Q17. “South African households have deleveraged this year. It is possible that this, coupled with the stable interest rate environment has fuelled the modest increase in consumption,” he says.

Financial, real estate and business services growth softened moderately to 1.2% q/q, while the government sector contracted by –0.7% in line with fiscal constraints.

“Growth for the three quarters of 2017 is averaging 1%, and given our expectations of a strong showing from retail in 4Q17, we are likely to upwardly revise our full year growth forecast which currently stands at 0.7%,” adds Jason Muscat, FNB senior economic analyst.

The slight improvement in the GDP outlook is a start, but is no cause for celebration yet. The low growth number envisioned for 2017 will mark the third straight year that the country’s expansion in economic activity will be below that of population growth of around 1.3%, notes Christie Viljoen, an economist with KPMG. The outlook for 2018 is only slightly better than this year, with the SARB saying in November it expected GDP growth of 1.2% in 2018. This will be about 1.1 percentage points below potential, according to the central bank’s estimates.

“Projected economic growth rates are below the levels needed to shore up state finances, and this worries rating agencies”, he says.

While global growth is providing some impetus, the fact remains that South Africa continues to underperform what is happening in the rest of the world. “We are squandering the opportunity provided by improved global conditions. We need domestic confidence and policy stability to improve before growth picks up. All of this is influenced by political factors,” says Hugo Pienaar, senior economist at the Bureau for Economic Research.

Despite the politics the SA economy remains fairly resilient and could be the base from which better outcomes can be expected. Or things could get worse, he says. “From where we sit next year is looking very uncertain.”

 

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