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South African economy enters recession as Q1 GDP contracts 0.7%

South Africa’s gross domestic product (GDP) contracted by 0.7% in the first quarter of the year, pushing the country in a technical recession.

This followed on the 0.3% contraction in GDP in the fourth quarter of last year.

Citing the trade, catering and accommodation industry as the largest negative contributor to the first-quarter GDP, Statistics South Africa (Stats SA) pointed out that the sector decreased by 5.9% and contributed -0.8 of a percentage point to GDP growth, followed by the manufacturing industry contracting by 3.7% and contributing -0.5 of a percentage point to GDP growth.

Seven out of ten divisions under the manufacturing ticker reported negative growth rates in the first quarter, with the largest contributor to the decrease being the petroleum, chemical products, rubber and plastic products division.

In contrast, the mining and quarrying industry increased by 12.8%, and contributed 0.9 of a percentage point to GDP growth – largely the result of higher gold and “other” metal ore production.

The Steel and Engineering Industries Federation of Southern Africa (Seifsa) welcomed the 12.8% increase in mining production in the first quarter, as the mining industry constituted about 25% of the metals and engineering sector’s demand profile.

Nevertheless, it revised its initial forecast for growth in the metals and engineering sector from 1.4% to 1.2% for 2017, as a result of a weaker-than-expected first quarter.

Seifsa senior economist Tafadzwa Chibanguza noted it was regrettable that, while commodity prices appeared favourable for the mining sector, the sector continued “to be in limbo in anticipation of an important policy direction” from government.

He added that this uncertainty was likely to continue to hold back much-needed investment into mining operations and, inevitably, this would impact negatively on the metals and engineering sector.

The agriculture, forestry and fishing industry rebounded in the first quarter of 2017 on the back of eight consecutive quarters of contraction. The industry’s increase of 22.2% in the first quarter of 2017 was mainly as a result of increases in the production of field crops and horticultural products.

Meanwhile, the electricity, gas and water industry contracted by 4.8%, owing to decreases in electricity produced in the first quarter, with the amount of water distributed decreasing, mainly driven by continued water restrictions in some parts of the country still recovering from the drought conditions.

The construction industry decreased by 1.3%. Decreases were reported for non-residential buildings and construction works.

Economist Mike Schussler told Engineering News Online that the latest statistics do not bode well for business, noting that it will “certainly drag business confidence even lower”.

During a telephone interview, he noted that the ratings agencies were now even more likely to downgrade the sovereign’s fiscal outlook. “We are in a very difficult arena . . . the country’s per capita income is not going to grow, our population is growing [at the same rate it has been] and if we do not see the GDP growing more than that, we are stuck,” he pointed out.

“The rest of the world is in a growth phase and we are stuck with Guptastan,” he added.

Citadel chief economist Maarten Ackerman said “the reality is that South Africa’s growth has been slipping sharply since 2011 compared to global peers. One needs to remember that the weak numbers released today are a reflection of the activity before the recent government reshuffle and subsequent ratings downgrade.

“The latest numbers confirm that we will need to do everything in our power to keep fiscal discipline to avoid any further downgrades in the near future,” he stressed.

The National Treasury noted that if the current growth rate was sustained, it would lead to a further decline in GDP per capita and revenue, “risking the sustainability of our fiscal framework and, more importantly, undermining the delivery of social services”.

“The current state of the economy puts more pressure on us as government, business, labour and broader society to intensify our growth programme and improve confidence as a matter of urgency to arrest the decline and set the economy on a higher growth trajectory,” it added.

Chibanguza said Seifsa was also gravely concerned about the economy’s descent into a recession, noting that it was particularly concerning that the tertiary sector – which historically does not contribute to contraction – had shrunk by 5.9% during the quarter.

“This is a significant deviation from the traditional norm and is indicative of the widespread nature of challenges. Economic reform is needed urgently to resolve the challenge of lacklustre growth,” he noted.

Meanwhile, Schussler said the slow GDP growth has already impacted on investment inflows and outflows in the country, with the local stock market “going nowhere” and local retailers and bankers, who derive significant turnover from South Africa, being hardest hit.

“The Reserve Bank will now have to think much harder about rates, as they want to provide relief to the consumer. This is a consumer recession,” said Schussler.

With take-home pay also severely impacted, the consumer would remain careful in spending, with confidence also at an all-time low.

“The consumer has started to see the corruption; they feel they are not getting anything of value anymore. Consumers are busy recovering and not prepared to spend anything on credit; people feel insecure in their jobs.”

Schussler highlighted that the GDP should have improved on the back of the uptick in the mining and agriculture industries, but was dragged down by the lower consumer confidence.

“Shops are emptier. The lipstick index – fast food – is slowing down, we’ve seen car sales in the doldrums for a long time. I last saw two estate agents in a museum; it’s a bum fight in that industry,” he quipped.

Seifsa CEO Kaizer Nyatsumba agreed, highlighting that the economy was likely to continue to under-perform for as long as the country lacked inspirational political leadership that enjoyed the confidence of all South Africans and ensured that government, business and labour worked together effectively as partners.

However, looking ahead, Schussler believed that “we are through the worst of it”, with society voicing its concerns through election results, which would translate in a “different country” in future.

He further pointed out that GDP growth figures for the second quarter should be better, as inflation has dropped radically and the upcoming two-month drop in the petrol price should boost consumer confidence.

Ackerman, however, noted that the numbers also suggested that the consensus growth assumption for the year – which was around 1% – was probably not achievable. “The weak growth numbers coupled with declining inflation suggest that the South African Reserve Bank should be in no rush to hike interest rates anymore. In fact, we might see a cut in rates before the end of this year.

“The current environment also suggests that the recent strength in the currency is not sustainable and a sharp depreciation in the medium term is becoming more likely to reflect the true, underlying economic fundamentals,” he pointed out.

North West University Business School Professor Raymond Parsons also voiced his concerns about the slow GDP growth, noting that it would negative implications for employment, tax revenues, business confidence and future investment ratings. “Whether we like it or not, the local economy is entering rough seas, and the storm signals are up.”

Stats SA also reported that expenditure GDP fell by 0.8% during the first quarter, with household final consumption expenditure (HFCE) down 2.3%, contributing -1.4 percentage points to total growth.

The main negative contributors to growth in HFCE were food and non-alcoholic beverages, clothing and footwear and transport.

Gross fixed capital formation (GFCF) grew by 1%, a second consecutive quarterly increase. The largest contributor to growth in the first quarter was machinery and other equipment, which increased by 7.9% and contributed 2.5 percentage points to growth in GFCF.

There was a R2.7-billion build-up of inventories during the quarter, which contributed 2.5 percentage points to total growth.

Net exports contributed negatively to growth in expenditure GDP. Both goods and services contributed negatively to the growth in exports. Exports of mineral products and vehicles and transport equipment were largely responsible for the decrease in goods.

Imports of goods and services increased by 3.2%, driven largely by imports of mineral products.

Source : Engineering News