Dodging recession a hollow victory
Q2 may be positive but annual growth will be close to zero
SOUTH Africa is expected to avoid the textbook definition of recession this week, economists say, but the outlook for the economy is still dire.
After a 1.2% contraction in the first quarter of the year, Stats SA will release figures for the three months to end-June, which should show expansion.
The textbook definition of a recession is two consecutive quarters of contraction.
While averting a recession would be welcome news, the bigger picture is that economic growth will still be close to zero this year — presenting continuing unemployment and poverty challenges — while a ratings downgrade looms large in December.
The likelihood of more interest rate hikes has also increased amid fresh rand weakness.
The Reserve Bank’s monetary policy committee has two meetings left this year, one this month and the other in November.
The economy probably expanded by a seasonally adjusted and annualised 3% in the second quarter, according to KADD Capital economist Elize Kruger. But even she admitted that overall economic growth in 2016 was still likely to disappoint, although the strong second-quarter outcome could push her forecast from 0.4% currently to 0.5% for the year.
Kruger’s 0.5% is more optimistic than the Reserve Bank’s forecast of no growth.
KPMG senior economist Christie Viljoen said: “Given that the Reserve Bank is expecting an average of 0% growth this year, there is no real reason to get excited about the economy being able to avoid a technical recession. The economy is not keeping pace with growth in the population and labour force.”
Most of the economy’s sectors are seen as having contributed positively to economic growth in the second quarter, except for agriculture.
Trade data suggested that agriculture might “still be in a bit of trouble”, Standard Bank economist Kim Silberman said.
Mining and agriculture, which were among the main drags on economic growth in the first quarter, may have continued to decline in the second quarter but at a slower pace.
Mining is feeling the effects of commodity prices that have yet to fully recover, and sluggish demand, particularly from the key export market of China.
Agricultural output is still feeling the effects of one of the most severe drought in decades, which led to rising food prices. Food inflation, which carries a significant weight of 14% of the consumer price index basket, escalated gradually in 2016 from 7% year on year in January to 11.5% year on year in July.
Manufacturing — the economy’s fourth-biggest sector — probably continued contributing positively to GDP in the second quarter, as it did in the first, if official Stats SA data are anything to go by. Output has increased, mainly supported by the higher production of petroleum, chemical products, rubber and plastic products; motor vehicles, parts and accessories and other transport equipment; and food and beverages.
The weak rand will wipe off some of the gains South Africa had derived from the currency, which until recently was trading firmer against major currencies. It is trading close to R14.66/$, weaker than around R13.20/$ early last month.
Global developments, particularly speculation over a US rate hike before year-end, have weakened the rand, and local politics has exacerbated this.
The rand tanked after the police’s specialised crime investigating unit, the Hawks, sent a letter to Finance Minister Pravin Gordhan asking him to present himself to make a warning statement, raising speculation that he might be charged.
Rand weakness will stoke inflation and may encourage the Reserve Bank to raise rates once more. The bank has not yet closed the door on rate hikes, as indicated in its statements that it remains in a rate-hiking cycle.
Reserve Bank deputy governor Daniel Mminele recently told a University of KwaZuluNatal business management conference that “the risks in the policy environment remain too numerous to be able to say definitively that the hiking cycle is over”.
Stats SA will also release GDP data on domestic spending.
Expenditure on real GDP is not expected to have improved much in the second quarter after falling by 0.7% in the first quarter. Household spending in particular has taken strain because of rising food prices, high inflation, and higher borrowing costs due to interest rate increases.
Investment spending by the private sector has also been falling, affected by low business confidence, weak economic growth and political and policy uncertainty.
The prognosis for South Africa is for the low-growth environment to remain for at least the foreseeable future, even in the face of improving electricity supply as well as domestic and global demand.
Silberman said potential GDP growth post-2018 was likely to be about 2%. This is far from the 5.4% aspired to for the growth and development framework, the National Development Plan.
Risks in the policy environment remain too numerous