Still hope for a New Dawn?


Maarten Ackerman, Chief Economist and Advisory Partner, Citadel

With GDP up 3.1% in the second quarter of 2019 (seasonally adjusted, annualised) and 0.9% for the year to June 2019, the markets have responded positively. The rand appreciated by some 10 cents on publication of the data and bonds yields declined by about 10 basis points.

It is comforting to see that we have avoided a technical recession, but most interesting is to note the severe impact that load shedding can have on the country. We had significant load shedding in the first quarter of this year and almost nothing in the second quarter, and the impact is clearly visible.

At the same time, the global environment stabilised somewhat in the second quarter of this year, resulting in better performance from exports, as well as mining and manufacturing, with less disruptive strikes from especially the mining sector as seen in the previous quarter.

What we can also see is that, in an economy where there are many structural issues, if we can sort them out and everything falls into place – if we can get Eskom to a much more sustainable place – then a 3.1% growth number is still achievable in this economy.

If we can replicate this performance and roll it out over a year, then we have the potential to reach 3% annual growth. Unfortunately, at only 0.9%, the year-on-year growth remains below population growth of 1.3%, so we can expect unemployment to continue increasing.

It is essential to lift annual GDP growth to be in line with or above population growth in order to address unemployment. Then we need to advance to the stage where we can start to create jobs. If we continue down this track, it will certainly be possible in the next three to five years.

Mining and manufacturing up, while exports remain flat

Looking a little closer at some of the sectors which contributed to growth, the mining industry particularly demonstrated a return of strength with growth of 14.4% in the second quarter, which is extremely positive given the importance of the sector in terms of job creation.

This figure reflects the fact that the global economy stabilised after a difficult first quarter, as well as the fact that South Africa was able to avoid load shedding, and fewer strikes in the sector.

Manufacturing also really surprised to the upside, printing growth of 2.1% for the quarter. Overall, however, the manufacturing sector unfortunately remains under some pressure – the latest ABSA Purchasing Manager’s Index (PMI) data released just yesterday showed that the sector had experienced a contraction, declining from 52.1 in July to 45.7 in August.

Additionally, the manufacturing industry has shed a significant number of jobs over the last year, and is an area where South Africa particularly needs to see stabilisation and growth.

By contrast, the agricultural sector posted a decline of 4.2% over the quarter, which is unfortunate given that it also declined by 13% in first quarter. Although the sector is very small, accounting for just 2% of South Africa’s economy, agriculture acts as a key driver of employment, and has been weighed down by factors including drought and land uncertainty, which have both impacted planting.

With only a slight contraction of 0.7% quarter-on-quarter, exports remained fairly flat over the second quarter, which in fact is somewhat encouraging for South Africa and demonstrates again that the global economy has started to mend after a very soft environment in the first quarter.

Strong capex growth hints at a better future

Another reason to be upbeat is the 6.1% growth in gross fixed capital formation (GFCF) seen over the quarter – the first time in the past five quarters that South Africa has seen posted a positive GFCF figure.

Regarded as a leading indicator, GFCF reflects  willingness to invest back into the economy by buying capital items such as transport equipment, machinery, building and the like. This is a clear indication of positive sentiment and activity that is taking place on the ground. It also dovetails with the uptick we have witnessed in foreign direct investment flowing into the country.

Consumers are on their feet again

On the consumer side, it is also encouraging to see that private consumption expenditure is up 2.8% indicating that the consumers are no longer on their knees, despite high fuel prices, low social grant hikes, a higher VAT rate and high unemployment.

This growth in consumption has, amazingly, come largely from sales of durable goods with semi-durables being second in line followed by non-durables and services. This points to a slightly better environment for the consumer as well.

Still weak on an annual basis, but there is hope on the horizon

We saw -3.1% in the first quarter and +3.1% in this quarter, almost cancelling themselves out. It will, of course, depend on what transpires in the next two quarters, but even if we print 2% in both of the next two quarters, that will only bring us to a growth number for 2019 of just below 1%. This is still much weaker than what was budgeted for in February, although slightly better than current estimates, and will add to the challenges faced by the fiscus and South Africa in general.

Overall, South Africa’s latest GDP figures definitely indicate that there is still some life left in the economy, and if we can continue to build momentum through implementing the right policies, the next three to five years could look significantly better. But, given the immediate structural issues, the road to recovery will remain volatile.