GDP Contraction: We’re now playing in injury time
JOHANNESBURG – The quarter-on-quarter annualised GDP growth has come in weaker than expected. The market was looking to a decline of some -0.2 percent, with the print coming in somewhat worse at -0.6 percent. Another negative quarter shows us once again that the economy is not really going anywhere at this point.
We had a very deep negative in the first quarter followed by a rebound in Q2, and now we have another negative growth rate. One could probably argue that although we don’t see a technical recession (in other words two consecutive quarters of negative growth), the economy is exhibiting the typical tell-tale signs of a low-growth trap and even possibly signs of a recession as well, although it is trying to break out of this.
For the year, growth is nearly flatlining at zero (0.1%), continuing the weak performance seen in 2018 where the economy grew just 0.8%.
This is in line with the lower growth forecasts we have seen in recent weeks coming out of the SA Reserve Bank and National Treasury, and is obviously painting a difficult picture for the fiscal situation in South Africa as well.
Clearly, the market didn’t take well to the news and responded accordingly. The rand lost ground to major currencies and the bond markets also took a hit.
Job creation not taking place
Drilling down into the numbers exposes some significant problems. Performance is lacking in the sectors where we have the ability to create more jobs: in the primary sector mining and agriculture were both down by 6.1% and 3.6% respectively, while manufacturing was off almost 4% and construction down by 2.7%. This sets an alarming scene altogether, and implies a bleak outlook from an unemployment perspective.
Growth did materialise in the tertiary sector, where government, trade and the financial sector were the main contributors. In fact, these sectors were basically the only positive contributors. And one could argue that government should probably be contributing less given the expenditure cap that we are trying to achieve, but unfortunately government is still spending at a healthy pace.
Consumers on their backs but business invests for the future
In terms of the expenditure side, household expenditure is basically flat at 0.2%, which really underscores the extent to which the consumer is taking strain. Given that we are a consumer-based economy, you can tie this into the very low inflation numbers that we are seeing at present: there is simply no demand in the economy.
Consumers don’t have jobs, fuel prices are rocketing, social grants are under pressure – and all of this combined means that people spent less, which clearly reduces inflationary pressures.
Imports being down by almost 7% is also a reflection that demand is constrained in the economy. Exports, by contrast were 3.5% higher which was encouraging to note.
Glimmer of hope for the future
The standout number on the expenditure side was Gross Fixed Capital Formation, which at 4.5% growth was very positive. This is the key number to monitor for positive growth. It is an indication of both business and government willing to invest into the economy and sets the scene for growth in future periods. It is one of the first leading indicators of better growth to come.
At this level, it is in line with the recent rising trend in foreign direct investments. The contribution to this came from investments in new machinery and equipment, as well as transport equipment. But, more importantly, this is the second consecutive quarter of strong growth in GFCF after the 5.8% witnessed in the second quarter.
This turnaround comes after five quarters of quite deep negative movement. Hopefully, this signals a return to investing back into the economy, in line with the FDI numbers we have already seen, which are themselves a result of the investment drive of President Cyril Ramaphosa. If this trend is able to continue, it will pave the way for stronger future growth.
Inequality under the spotlight
Going back to consumers, the number has been quite flat, showing that households remain under pressure. There was a decline in non-durable and semi-durable goods, and an increase in services and durable goods. This reflects that higher-income consumers are still bearing up relatively well under the pressure, supporting growth in the durable goods component, while lower-income consumers are really struggling.
Restaurants, hotels and alcoholic beverages generally attract more spending power by higher-income consumers with more purchasing power, while housing, water, electricity, gas, clothing and footwear, which have seen a large decline, form a much bigger component of the lower-income basket and reveals where these consumers may be cutting back. This again highlights the gap between South Africa’s higher and lower-income earners, and the depths of inequality in the country.
Lastly, general government services, which is an area that we would actually like to see decline given our fiscal situation, has instead increased 2.4%. This increase was largely as a result of civil service employment in provincial government, despite the fact that the recent MTBPS re-emphasised the urgent need for government to reduce its headcount and wage bill.
Bleak situation that needs urgent attention
All-in-all, these GDP numbers have added to what is turning out to be a fairly bleak year for South Africa, with the country beset again by the lack of growth that is the root cause of our fiscal challenges. In line with this, tax revenue is unlikely to increase, and these numbers make the case even more strongly that we are in fact playing in injury time, and that government urgently needs to take action and implement the necessary reforms. The time for talk is over. We cannot wait until the February Budget Speech before we start with reforms. We need to start implementation now.
Maarten Ackerman is chief economist and advisory partner at Citadel.