Second quarter offers GDP joy
If we see a bit of stability, consumer confidence can stabilise and turn around
Maarten Ackerman Citadel chief economist
● Economic growth of up to 3% is forecast for the second quarter of this year when official data is reported on Tuesday.
Factors such as power blackouts and softer global growth that caused the worst contraction in GDP in a decade in the first quarter had dissipated by the following quarter.
This means that SA has likely avoided a technical recession, defined as two or more consecutive quarters of contraction. In the first quarter the economy shrank by 3.2%.
Maarten Ackerman, chief economist at Citadel, said “higher-frequency data is definitely pointing towards a bit of a rebound”. The latest leading indicator from the Reserve Bank, though weak, was “not suggesting that the economy is collapsing”.
Key industries such as mining and manufacturing, which recorded double-digit contractions in the first quarter, reflected mild improvements though “mining is still taking a lot of pain”.
Retail sales had risen more than 2%, which was important for a consumption driven economy such as SA’s and showed that consumers, though constrained by higher taxes and prices, were not “down on their knees”, Ackerman said.
“If we see a bit of stability in the broader economy, consumer confidence can stabilise and turn around and consumers can potentially contribute more to economic growth going forward.”
Citadel has forecast growth of 1.5% for the second quarter, Momentum Investments predicts 1.9%, NKC African Economics 2.3% and Investec 2.8%.
Sanisha Packirisamy, an economist at Momentum Investments, said the latest Absa purchasing managers’ index compiled by the Bureau for Economic Research reflected negative sentiment in the manufacturing sector over the quarter, but in July the index improved marginally.
Production gains during the quarter came from motor vehicles and parts, and food and beverages. But lower production of petroleum and chemical products curbed final volumes.
In addition, trade tensions between China and the US would dampen global trade and affect exports of SA’s manufactured goods, Packirisamy said.
“Persistently weak domestic demand could cap short-term growth prospects in manufacturing production,” she said.
Mining rebounded during the quarter, helped by coal and iron ore production, but weaker gold output detracted from growth. High electricity and labour costs were risks to production, Packirisamy said.
Agriculture, which has historically been a swing factor in GDP due to its volatility, might reflect healthy output in winter crop areas, which received good rainfall. But that would be reflected only in third-quarter data.
The Agricultural Business Chamber forecast growth of 4% in the second quarter from the previous period.
Wandile Sihlobo, chief economist at the Agricultural Business Chamber, said better output from the horticultural industry and some harvesting of summer grains, as well as statistical base effects, would boost the agricultural data.
“Overall for the year we still think that SA’s agricultural sector will underperform. Our numbers are sitting within a 2% contraction for the sector for the year.”
He said unfavourable weather had caused a double-digit decline in almost all summer grain and oil-seed crops, “and we think that is going to weigh on the fortunes of the South African agricultural sector”.
Sihlobo said that SA’s wine and fruit continued to find markets in Europe and parts of Asia, while exports of beef to China and the Middle East were thriving.
Last year SA was the 32nd-largest agricultural exporter in value terms, he said.
However, rising global meat prices underpinned by African swine fever in China presented a grain-related food inflation risk. “We pay attention to that particularly on grains because it links to some of the things we are importing, like wheat.”
Though growth might strengthen in the second quarter, the overall growth outlook is causing headaches.
This week, Mark Kingon, former acting commissioner of the South African Revenue Service, said at the Tax Indaba in Sandton that Sars would miss its tax collection target of R1.42-trillion this financial year due to low growth. This would be the sixth consecutive year the agency had missed its target partly due to weak GDP.
Citadel’s Ackerman said fixed capital investment, another important figure to be released with GDP, has been negative for several quarters and shows no new investment into the economy.
“That number is very important because that normally paves the way for more sustainable growth over the longer term.
“Our expectation is that if you look at foreign direct investment, which was on the increase at least in 2018, and some of the things coming into the pipeline, you should expect that to slowly start to stabilise and increase. It will also come with a little more confidence the economy is moving forward.” But he said the swift implementation of structural reforms by the government was critical to ignite growth.