Agriculture feeds strong Q3 GDP growth, but detail shows a consumer under pressure

Carmen Nel, Economist and Macro Strategist, Matrix Fund Managers

Economic growth surprised strongly to the upside in the third quarter, with GDP rising by 1.6% quarter-on-quarter, seasonally adjusted (q/q, s.a.) – well ahead of consensus expectations of 0.4%. The strong quarterly print and the low annual base – in part due to the July unrest in 2021 – lifted year-on-year growth to a robust 4.1%.

The upside surprise was largely due to a strong expansion in agriculture amid another bumper harvest across various grains. In addition, construction, trade, transport, storage and communication, and finance and business services all had a solid quarter. Intensified load shedding likely weighed on small businesses in the services sector, with community and personal services contracting in Q3.

The consumer remains buffeted

The expansion in construction – the first since 1Q21 – was reflected in the rise in gross fixed capital formation, while the improvement in production across mining, manufacturing, and trade mirrored stronger growth in exports and a substantial inventory build. While the latter may reflect improved supply chains and restocking, it could also signal an unintended increase in the face of weak domestic demand. This would tie up with the decline in household consumption in Q3, as the spending breakdown revealed a defensive bias. Surging food and fuel prices, as well as larger interest rate increases dampened consumer spending in Q3. The positive aspect was that restaurants and hotels did well, most likely reflecting the ongoing recovery in inbound tourism, particularly with the currency being very competitive globally.

The gross operating surplus (a rough proxy for economy-wide profits) expanded at 12.1% y/y in Q3, up from 5.5% in Q2. The improvement was broad based and points to the potential for another positive tax revenue surprise in the February 2023 budget. In contrast, compensation growth softened form 5.2% to 5.0%, which combined with stronger GDP growth, implies slower unit labour cost growth. The latter is an important consideration for inflation and would therefore be a welcome development.

And we can expect less gas on the monetary policy pedal

While the data reveals some resilience in production and external demand, it points to a consumer that is feeling the pinch. As such, it should have nuanced implications for monetary policy. At a headline level, the economy expanded by 2.3% for the year to September and even if it contracts in Q4, full year growth is likely to print around 2.0% – 2.5%. This implies a smaller, negative output gap, all else assumed equal, and a slightly higher path for the repo rate.

The GDP data will not be the primary determinant in the SARB’s deliberations in January. Not only is the data already three months old, but the SARB’s focus has been firmly on inflation in its normalisation process. While this has been framed in the context of a risk to de-anchoring inflation expectations, the accelerated hikes from Federal Reserve have been a notable contributor to the SARB’s pre-emptive risk management. A very likely 50bp hike from the Fed next week should cement another increase from the SARB in January. The size of the increment is up for debate, as the voting pattern should shift from 75bp versus 50bp to 50bp versus 25bp.

Markets are currently more interested in politics

There was minimal market reaction to the data as investors and traders remain preoccupied by the unfolding domestic political developments, which are vying for dominance with the perceived Fed pivot, hopes for China’s reopening, and risk-on global backdrop.