SA’s troubling performance
Talk about a cold shower. SA’s economy shrank by 2.2% in the first quarter of 2018 on a seasonally adjusted and annualised basis. Although most economists had pencilled in a decline, the negative number is much higher than anticipated. The results are that the first quarter marked the economy’s worst quarter-on-quarter performance since the global financial crisis. So much for Ramaphoria. The shock of the lower-than-expected number had an immediate and dramatic effect on the rand, which weakened about 10c against the dollar, a decline that was pared down later in the day.
The decline was really the result of unexpected weakness almost across the board. Some sectors were expected to decline, but there was hope these declines would be mitigated by rebounds in other areas. As it turned out, mining fell 9.9%, manufacturing 6.4% and construction 1.9%. But the real shocker was the agricultural sector, which declined 24.7%.
Earlier in 2018, there was hope that consumer confidence, which is running at a record high, would have held up consumer spending, but retail sales came in negative, too.
There are reasons to be concerned at the decline, but also reasons to hope that this shocking number will turn around fairly quickly. One reason to refrain from panicking is simply mathematical: the decline comes off an unexpected high fourth quarter of 2017, so comparing the first quarter of 2018 to its immediate predecessor makes the decline look worse than it is. Annualising the number compounds the apparent decline.
But opening the focus slightly results in a much less dire prognosis. It is worth noting that the Reserve Bank has kept its fullyear growth forecast unchanged at 1.7%, and most economists are still forecasting full-year growth at about 2%.
The other reason to be judiciously unruffled about the decline is that there is normally a lag of about two quarters between a rise in business confidence and a turnaround in investment spending.
The South African Chamber of Commerce and Industry’s business confidence index did jump earlier in 2018 from 90 to 100, but declined 1.7% later as the sheer scale of the problems faced by the new administration began to sink in. Likewise the RMB/BER business confidence index has shown strong gains, but still, in fact, remains in negative territory.
The question remains whether and how soon the Cyril Ramaphosa-induced boost to business confidence will translate into a turnaround in investment spending. It is worth noting that Ramaphosa was only sworn in as president on February 15, halfway through quarter one, so the expectations of a quick turnaround were probably always going to be disappointed.
Yet, SA’s enduring underperformance remains deeply troubling. At least some aspects of this tendency point to structural problems. The fact that there was a marked drop in exports and imports in the first quarter suggests business is trending towards greater caution, which is disappointing, given strong global growth. Looking sector by sector, it is easier to see why. Mining remains on ice pending changes to the mining regime. The petrol price is at record levels and its effect has still to play its way through the economy. SA is also entering an election period in which investor sentiment will remain fragile while political parties vie to overpromise on a range of government programmes.
And for the medium to long term, the fundamental problem remains: population growth is 1.5% a year, which means SA falls further behind in providing opportunities for its people.
Essentially, SA’s economy is still in a fragile state after almost a decade of policy uncertainty and mismanagement; there is still a very low savings rate and there are still big mismatches in the labour market. If the low growth figure prompts real reforms in these areas and adds urgency to those often spoken about but never implemented “structural reforms”, it will be a cold shower worth taking. Otherwise, SA can expect more icy blasts.
ESSENTIALLY THE SOUTH AFRICAN ECONOMY IS STILL IN A FRAGILE STATE