Do not panic if firstquarter growth is bad

Tucked away in the monetary policy committee’s statement last week was a suggestion that attracted relatively little attention: SA’s first-quarter economic growth rate could be a minus, not a plus.

Following negative growth in mining and manufacturing, said the committee, there was a “possibility” of a contraction in GDP in the first quarter, though the Reserve Bank’s full-year growth forecast was unchanged.

Is the market prepared for a negative first-quarter number when Statistics SA releases the new GDP data next week? Amid the continuing Ramaphoria, it’s not clear that it is. And there’s at least some danger that unexpected bad news could prick the confidence bubble and dent prospects for higher growth.

The most recent Reuters consensus forecast still sees first-quarter growth at a positive 0.8%. But recent “highfrequency” data, as economists call the monthly statistics they use to try to predict what the quarterly outcome might be, suggest otherwise. Those data show first-quarter declines in the mining and manufacturing sectors, as well as in retail trade.

The available data show that almost 40% of GDP is already in negative territory for the first quarter. Agriculture could well go negative, too, after shooting the lights out in 2017.

The big question is what will happen in the services sector, where there is little highfrequency data.

Economists predict the first-quarter number will at best be a small positive, but Absa economist Peter Worthington is one who says the economy is definitely on track for a negative GDP print; the only question is how large it is. He forecasts a negative 1.3%.

RMB economist Etienne le Roux, however ,says: “The number at face value may be a shock, but please don’t panic.”

Most in the market are reassured by the fact that the Reserve Bank has kept its full-year growth forecast unchanged at 1.7%. And the quarterly GDP numbers are as much about technicalities as substance.

The quarterly number that tends to get all the attention is the seasonally adjusted and annualised one — so the first quarter of 2018 compared with the fourth quarter of 2017, to the power of four to give the annualised number. The fourthquarter GDP growth rate was a strong 3.1%, so compared with that the first quarter may well contract, and the contraction is magnified by annualising.

If one instead compares the first quarter of 2018 with the very weak first quarter of 2017, which was a shock negative 0.5%, the picture will be much brighter, with this year-on-year growth rate likely to be faster than the 1.3% the economy recorded for the whole of 2017.

One reason most economists are not bothered by the prospect of a first-quarter negative is the reassurance that the Reserve Bank has not revised its full-year growth forecast — which also means, though, that there is no prospect that the monetary policy committee will be startled into cutting interest rates in response to a firstquarter growth shock, as it was in July 2017.

Another reason is that all the confidence indicators are pointing to a bounce from the second quarter, which realistically is the very earliest anyone should have expected the happy change in SA’s political fortunes since December’s ANC election to start showing economic results.

Consumer spending is expected to prop up growth again in 2018, as it did in 2017, but the big question for SA’s growth prospects now is how soon the Ramaphosa-induced boost to business confidence will translate into a turnaround in investment spending — and how sizeable that turnaround might be.

Research at the Reserve Bank in 2017 showed a close and quantifiable link between business confidence and private sector investment spending, which accounts for almost two-thirds of total investment spending and is a key driver of economic growth.

The results suggested that a 1% increase in the business confidence index leads to a 0.5% increase in investment in the long run and a 0.2% increase in the short run, with a lag of two quarters, researchers Marea Sing, Rudi Steinbach and Nkhetheni Nesengani wrote in an October 2017 note.

All this suggests that the second quarter, not the first, will be the big one for growth going forward. Assuming a negative first quarter, the economy would probably have to sustain average growth rates of 2% or more in the remaining three quarters to get to the full-year levels the Reserve Bank and other economists are forecasting.

Most forecasts are in the 1.8% to 2% range, rising to over 2% in the next couple of years, with Goldman Sachs the euphoric outlier at 2.4% and rising over 3% in 2019.

As S&P Global Ratings reminded us in its update last week, 2% is still only just positive relative to population growth. SA’s economy has a long way to go to repair the ravages of recent years. That it just takes a few technicalities to plunge the economy into negative territory, even temporarily, is a demonstration of how fragile SA’s growth prospects still are.

But they are better than they were, and if the conditions are created to allow the promised private sector investment to happen, they could be a lot better.

ONE REASON MOST ECONOMISTS ARE NOT BOTHERED IS THE REASSURANCE THAT THE RESERVE BANK HAS NOT REVISED ITS FULL-YEAR GROWTH FORECAST