South Africa enters a Technical Recession

5 Sep 2018

The market consensus for a positive second quarter GDP number were surprised on the downside today with the announcement that the economy had contracted by 0.7%. We were also surprised by this number, but then the forecast risk was always high given that it is virtually impossible to forecast all the components of the GDP number.

Agriculture was another huge negative, down 29% quarter on quarter annualised, contributing significantly to the GDP contraction.

The first quarter GDP number was already negative at -2.2% and was further revised into deeper negative territory at -2.6% - also to a large extent due to further downward revisions to agriculture.

These two consecutive quarters of negative growth puts us into technical recession. That in itself isn’t that damaging, as two slight negative quarters might be far less significant than one deeply negative quarter that wouldn’t have been classified as a recession. However, be that as it may, we’re still in a very low growth/no growth environment. This is even more damaging given the strong global economy and the fact that we haven’t been able to participate in the global strong growth environment.

The main reason for this low growth is the current severe lack of confidence – consumer, business and investor, facing our country. Lack of confidence in politicians and lack of confidence in policy is severely impacting our economy. There are some additional issues though. For example, policy makers couldn’t have done anything about the negative agricultural growth. We had a record agricultural year last year thanks to the hugely improved maize crops. These continue to be big this year, but are down 28% compared to last year. This is still more than enough to satisfy our own needs and to export, but still led to a negative agricultural contribution to GDP.

What this means for 2018 growth is that it will be even weaker than last year at 1.3%, whereas at the start of this year we expected stronger growth to come through. Even if there’s a recovery in the third and fourth quarters, growth at best will be around 0.7/0.8%.

The second quarter was also weak in terms of trade sectors, such as consumer spending for example. Consumers were impacted by lack of confidence and higher pricing such as VAT and petrol increases, In addition to this, public sector employees – which make up roughly a third of the total wage bill in SA – didn’t get their annual increases during the second quarter this year, which had a significant impact in terms of real consumer incomes. The new wage agreement was backdated to April meaning they got back pay at the end of July, so there should be some recovery in consumer spending and retail sales, even GDP, in the third quarter.

The recession announcement, of course, has had a severe impact on currency, which was already under pressure from concerns around emerging markets, driven by fears of contagion from Turkey and Argentina. The reasons for the latest fall in the rand are based on concerns around much lower growth, and the ability of Government to reach their fiscal targets, putting our credit ratings at renewed risk.

A weaker currency is reflected immediately in the economy through petrol price increases and will eventually have an impact on other pricing such as food for example. The SARB has already said that they will only react in response to second-round inflationary impact; in other words they will not act simply because the petrol price has gone up due to a weakening rand. In any case, the weaker rand impact and petrol price increase are hugely deflationary, in that people have less to spend on other goods, so there are no demand-driven price increases. It has already been difficult to pass on price increases from a weaker currency given the slow growth in the economy and that will continue. Therefore the SARB will continue to talk hawkishly, but I don’t expect an interest rate hike is imminent given the deflationary impact of recent price increases and the weak state of the economy.

Despite all of this, I still think we’re probably sitting at peak levels of pessimism regarding economic growth, confidence and currency. We believe our investment theme of ‘Winds of Change’ is intact, but we still maintain that it will take time. With elections coming up, we shouldn’t expect significant policy changes before then. But if President Ramaphosa’s investment target of $100 billion over five years comes to fruition, it is not impossible that – in conjunction with other policy measures – we can reach 3/3.5% GDP growth by the early 2020s.

  • Johann Els
  • MacroSolutions