But no need to be too despondent
THE SOUTH AFRICAN ECONOMY is definitely not in a recession. Nor is it heading for one. That much was clear from the latest gross domestic product figures, which showed growth of 4,9% in the second quarter from a weak 2,1% in the first. The fact that the “R” word isn’t appropriate will come as cold comfort to consumers, of whom most feel as if the economy is in recession anyway. Their pain is evident in the GDP numbers, which show a decline of 2,2% in output in the wholesale and retail trade sector.
Stanlib economist Kevin Lings says it’s the first quarterly decline in retail activity since third quarter 2001 – almost seven years ago. He says it’s the largest decline in retail sector GDP since fourth quarter 1997.
Consumers are taking strain mainly due to a five-percentage point hike in interest rates since June 2006, which took the prime overdraft rate to 15,5%. High food and fuel price increases have also meant consumers have had less money in their wallets.
The GDP figures for the retail sector vindicate the SA Reserve Bank’s recent decision not to hike interest rates. The numbers show the Bank has achieved what it’s able to achieve with the help of interest rates – it’s cooled consumer demand significantly. Any further action would be overkill; some may argue that the extreme weakness of the retail sector is evidence that some overkill is already evident.
So consumers are clearly taking strain. But other sectors of the economy shone in the second quarter, taking the growth rate close to 5%. (All growth rates are quarter-on-quarter, seasonally adjusted and annualised, unless otherwise stated.) What the GDP figures clearly show is a two-track economy: the one track, driven by consumer demand, is battling while the supply side track is doing well.
On the face of it, the supply side of the economy is doing exceptionally well. Mining output grew 15,6% in the second quarter while manufacturing grew 14,5%. Together, those sectors contributed 3,1 percentage points to the growth rate in the second quarter.
However, those stellar growth rates exaggerate the underlying situation. You must bear in mind those growth rates are for the second quarter compared with the first quarter, and then expressed as an annualised rate. The base in the first quarter was exceptionally low (manufacturing and mining both declined) due to electricity cuts. A return to more normal levels of production resulted in massive increases in the annualised growth rates.
You get a different picture when you look at the GDP figures on a year-on-year basis. Mining production fell 5,5% in second quarter 2008 compared with the same period last year. That figure suggests the sector is hardly in the pink of health and that’s unlikely to improve, as recent declines in commodity prices should put pressure on the sector. After rebounding in the second quarter, mining production is unlikely to remain a significant contributor to GDP growth in the next few quarters and could subtract from growth.
Manufacturing output on a year-on-year basis grew an apparently impressive 9,8% in the second quarter. However, remember the Easter holidays fell in the first quarter this year and in the second quarter last year, which creates significant distortions. Though the manufacturing sector put in a good performance in the second quarter, the underlying situation isn’t as healthy as the statistics suggest at face value.
In addition, the prognosis for the manufacturing sector is far from good. That’s clear from Investec’s Purchasing Managers’ index (PMI). The PMI is a leading indicator of conditions in the manufacturing industry and is based on a survey of business people. The seasonally adjusted PMI fell to an alltime low since its inception in September 1999 of 42,8 in July this year, down from 43,8. Any reading below 50 means the sector is contracting.
“The recent weakness in the sector is consistent with the Bureau for Economic Research’s manufacturing business confidence index, which declined to a seven-and- a-half year low during the second quarter. However, the decline is yet to reflect in the official manufacturing sales and production data,” says Mokgatla Madisha, portfolio manager at Investec Asset Management.
But even though second quarter GDP performance is unlikely to be repeated, there’s no reason to get too despondent about economic growth for the rest of the year. Economists still expect growth of around 3% for the year as a whole. That’s a far cry from the 5% level that we’ve grown accustomed to – but that growth was to a large extent built on an unsustainable consumer boom.