Prospects of growth in 2019 grow dim
SA’s shock economic contraction in the third quarter, the second decline of 2019, crystallised the need for urgent economic reforms if the country is to avoid a damaging ratings downgrade after February’s budget.
Stats SA said on Tuesday that GDP shrank by 0.6%, compared to an unchanged reading forecast by economists in a survey by Bloomberg. The economy grew just 0.1% from the same period in 2018. The report reinforced concern that SA will only manage marginal growth for the full year, making it harder for the government to contain debt and increase revenue.
The rand declined by the most since October 30, when finance minister Tito Mboweni unveiled a medium-term budget policy statement that showed a sharp deterioration in SA’s finances. He forecast a budget deficit of around 6% of GDP in the near term and warned that debt as a percentage of output could reach 80% in a decade.
The decline followed growth of 3.2% in the second quarter, which was revised up slightly from 3.1%. GDP contracted 3.1% in the three months to March.
Growth for the nine months to September was just 0.3%, Stats SA said.
The economy, which needs higher growth to alleviate an unemployment rate of close to 30% and narrow one of the world’s biggest wealth and income gaps, will probably struggle to meet the 0.5% expansion forecast by the government and the Reserve Bank, said Maarten Ackerman, chief economist at Citadel.
The GDP figures follow warnings by ratings agencies S&P Global Ratings and Moody’s Investors Service about SA’s weak growth, rising government debt and ailing stateowned entities. Both changed their outlook on SA debt to negative in November, with Moody’s warning that it could change its rating if the government does not come up with a credible turnaround plan in the February budget .
Moody’s is the last major ratings agency to have SA at investment grade, and a downgrade could prompt foreign investors to sell as much as $8bn (R117bn) of local bonds, putting pressure on the currency and raising the cost of borrowing across the economy.
That risk will probably prevent the Bank from offering relief to consumers, who will be hit with a 22c/l increase in the petrol price on Wednesday, in the form of an interest rate cut, Nedbank economists said in a research note.
“Economic reform plans need to be implemented promptly to turn the ship around,” said Sisamkele Kobus, economic research and fixed income analyst at Investec Asset Management.
“This number doesn’t really make matters worse, but it shows that the moves that S&P and Moody’s made some weeks ago are quite valid,” said Kobus.
The declines in GDP were driven mainly by falls in the mining, manufacturing and transport, storage and communications industries.
Mining shrank 6.1% in the three months to September; manufacturing fell 3.9% and transport, storage and communication decreased 5.4%. The intense drought sweeping parts of the country led to agriculture shrinking 3.6%
Measured on an expenditure basis, GDP shrank by 0.3%. Household final consumption expenditure grew at a slower 0.2% in the third quarter, down from 2.6% in the second quarter. Households account for about two-thirds of expenditure on GDP and this was a sign of the pressure they were under, said Ackerman.
“Consumers don’t have jobs, fuel prices are rocketing, social grants are under pressure, and all of this combined means that people have spent less, which clearly reduces inflationary pressures,” he said.
Gross fixed capital formation – a sign of investment in the economy – grew by 4.5% and was one bright spot amid the bad news, said Ackerman.
The rand was also pulled down by global jitters after US President Donald Trump suggested a trade deal with China might not be clinched until after the US elections in November 2020. Still the rand was the worst performer among 31 major currencies tracked by Bloomberg, falling 0.8% to R14.6668/$.