Dave Mohr and Izak Odendaal Better-than-expected Household spending up Households driving real economic growth

STATSSA’s latest economic growth data – predating the recent political changes – show there are real reasons to be optimistic.

Real GDP – the broadest measure of economic activity after inflation and seasonality are adjusted for – grew at an annual rate of 3.1% versus 2017’s third quarter. So, growth for 2017 was 1.3%. While still pedestrian, it’s almost double 2016’s 0.6% growth rate and was better than widely expected. In the recent budget, National Treasury estimated 2017 real growth at 1% and 2018 growth at 1.5%. It estimated nominal growth of 6% in 2017, rising to 7.3% this year, but actual 2017 nominal GDP growth was better, at 6.9%.

Last year’s technical recession was also revised away. This suggests some caution in relying on GDP numbers as they’re often changed later on as new data or estimation techniques become available, and revisions are usually upwards. The other problem with GDP numbers is they’re released with a considerable lag. There are other more timeous indicators of activity, for example the Markit/Standard Bank Purchasing Managers’ Index, which is back in positive territory.

Nonetheless, there important takeouts from the GDP data. GDP can be viewed in terms of what’s produced, spent and earned. On the production side agriculture had another strong quarter recovering from the 2015/2016 drought. Mining was negative, while construction was also negative for the fourth consecutive quarter. However, trade, catering and accommodation grew 4.8%, while the economy’s biggest sector – finance, real estate and business services – grew 2.5%.

Real household consumption grew 3.6%. Households account for 60% of GDP by spending; if they do well, the economy usually does well. As SA Reserve Bank numbers have shown, household borrowing has been growing at a rate barely in line with inflation; if this picks up as households and banks gain confidence, consumer spending can remain robust.

Real fixed investment spending by business grew 0.9% yearon-year in the fourth quarter – clearly pretty anaemic. However, the trend is heading in the right direction. This hinges largely on increased business confidence. The economy’s total wage bill grew 8.1% in the December quarter versus a year ago. With inflation running below 5%, real household incomes are growing at around 3%.

So the stars appear to be aligning for 2018, as far as economic growth is concerned. – Dave Mohr and Izak Odendaal, Old Mutual Multi-Managers.