JOHANNESBURG – South Africa fell into recession in the first half of 2018, that is two consecutive quarters where gross domestic product (GDP) fell by -2.6 percent qqsaa (quarter on quarter seasonally adjusted annualised) and -0.7 percent qqsaa, respectively.
The contraction was smaller in the second quarter, as a number of industries saw a less dire performance, and indeed excluding the agricultural sector, which recorded a large contraction of 29.2 percent qqsaa, South Africa saw GDP growth of 0.1 percent qqsaa in Q2.18 (second quarter of 2018).
The agricultural sector clearly has had a key negative influence on the recent GDP outcomes, contracting by -33.6 percent qqsaa in Q1.18.
In the second quarter of this year, many field crops were harvested late due to weather conditions and this led to the poor performance, but these same crops will be reflected in the Q3.18 GDP figures, likely causing the reading on the economy to rebound.
Indeed, the trade, catering and accommodation sector, which saw a contraction of -1.9 percent qqsaa in Q2.18, after Q1.18’s -3.1 percent qqsaa, is also expected to see an improvement in Q3.18 as civil servants and a number of state-owned enterprise employees see salary increases, and some back pay, from the latest round of wage negotiations.
The transport sector is expected to see an improvement for similar reasons in Q3.19, after contracting by -4.9 percent qqsaa in Q2.18.
The sector – which did provide key growth momentum, the finances, real estate and business services sector with its weighting of 21 percent – is likely to continue to support GDP in the remainder of this year, aided by improved household debt metrics.
One area that also exerted downward pressure on the GDP print was the contraction in general government services (-0.5 percent qqsaa), with a key weighting of 15 percent.
However, a contraction in general government services is to be welcomed given the need for lower expenditure levels to counteract the country’s growing deficit and debt bill. From the expenditure side, HCE (household consumption expenditure) contracted by -1.3 percent qqsaa, while inventories fell by -R14.2bn. Inventory rebuilding is likely in Q3.18, which will also lift GDP.
News of South Africa’s recent recession caused the rand to convincingly pierce R15.00/USD, reaching R15.26/USD, as investors likely exited local portfolio assets on the negative implications for credit ratings and poor economic performance.
Moody’s recently said: “The pace of South Africa’s fiscal consolidation will be slower than government forecasts as weaker than expected economic growth and a rising public sector wage bill act as fiscal headwinds.”
However, economic activity has worsened since then, as have government financing figures, and the agency is likely to keep a close eye on South Africa’s performance for the rest of this year and next, with South Africa increasingly at risk of a negative outlook – currently at Baa3 with a stable outlook.
While little can be done to change the past, much can be done to rectify mistakes and improve the outlook. South Africa has seen its competitiveness and institutional strengths deteriorate substantially in the past few years, as have its credit ratings.
The governance of many SOEs and state institutions has also deteriorated, as has the health of government finances, depressing business confidence over virtually a decade. Real household income growth and the efficacy of corporate boards also deteriorated and corruption proliferated.
South Africa urgently needs to turn this around, rapidly repairing institutions, bolstering competitiveness by focusing firmly on improving the environment for (socially conscious) capitalism to thrive and cutting government expenditure. There is a good correlation between the performance of the economy and that of government finances. Repairing the latter as occurred during the Mandela presidency from 1994 to 1999 is now urgently needed in South Africa to restore the former.
Annabel Bishop is the chief economist at Investec.
The views expressed here are not necessarily those of Independent Media.