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South African economy reaps benefit of weak rand
September 6, 2018, 4:47 pm

Final sales grew 2 per cent in second quarter as exports surged 13.7 per cent

South Africa recently hosted the 10th BRICS Summit amid growing global trade tensions

The South African economy reaped the benefits of a weaker rand as real final sales, which is gross domestic product (GDP) less the change in inventories, grew by 2.0 per cent on a quarter-on-quarter (q/q) seasonally adjusted annualized (saa) basis in the second quarter after exports surged by 13.7 per cent on the same basis, while imports grew at a slower rate of 3.1 per cent.

This meant that net exports added 2.8 percentage points to GDP growth, offsetting the 0.8 percentage points decline in domestic demand.

On a year-on-year (y/y) basis GDP growth eased to 0.5 per cent in the second quarter due to the slowdown in domestic demand after growing by 1.9 per cent in the first quarter as exports grew by 1.5 per cent after a 0.3 per cent decline in the first quarter. Household consumption expenditure slowed to 1.5 per cent growth from 3.2 per cent in the first quarter.

This resulted in GDP growth of 1.2 per cent y/y in the first half with many economists expecting a better second half as above-inflation wage increases boost consumer demand.

The South African economy entered a technical recession, which is defined as two consecutive quarters of contraction, due to a large drawdown in inventories in the second quarter as domestic producers were unable to meet soaring external demand. The economy contracted by 0.7 per cent in the second quarter after a 2.6 per cent drop in the first quarter.

Citadel Chief Economist Maarten Ackerman said that although the technical recession of two consecutive quarters of contraction heightened South Africa’s risk of suffering yet another credit downgrade in the second half of the year, he expected an upside surprise in the second half.

“The 1.5 per cent growth estimated by National Treasury in February’s budget speech is currently at severe risk and will likely need to be revised downwards, creating a very difficult environment next month for the delivery of the Medium Term Budget Policy Statement,” he said.

He noted that if the drag from the agricultural industry were excluded from the figures, weak contributions from other industries would still see GDP growth at a mere 0.1 per cent.

“Despite this, it is somewhat positive to see that the mining, construction, electricity and financial industries all contributed positively to the economy over the past quarter, as these industries form the growth engines of the economy and hold the most potential for job creation. If Cyril Ramaphosa and his government continue with the current policy strategy as well as provide clarity on mining and land, I believe that there might be a surprise to the upside coming from the low base,” he concluded.

The domestic demand side of the GDP equation pulled down growth as household final consumption expenditure declined for the first time since the first quarter 2016 with a 1.3 per cent drop on a q/q saa basis in the second quarter, while government final consumption expenditure only grew by 0.7 per cent. Poor business confidence meant that gross fixed capital formation decreased by 0.5 per cent.

Professor Raymond Parsons from the North West University Business School also highlighted the pockets of strength in his reaction statement.

“The extent to which the latest GDP figures for the second quarter confirm that the SA economy is in a ‘technical recession’ is bad news for business confidence and employment prospects. There are fortunately still several pockets of strength in the economy. But it is clear that SA has greatly underestimated the economic damage of the past decade, on how long it will realistically take to turn the economy around, and the negative impact of persistent levels of policy uncertainty, such as around issues like land reform. Boosting business and consumer confidence remains a major key if SA is to break out of the ‘low growth trap’ into which the recession has now pushed it,” he wrote.

Sanlam Investment Management economist Arthur Kamp warned that the expected recovery in the second half could be compromised by increasing protectionism, a point highlighted at this year’s BRICS Summit in Johannesburg.

“Looking ahead to the rest of 2018 and 2019, it seems reasonable to expect growth momentum to lift a little as the impact of the drought in the Western Cape fades, assuming the nascent shift towards global trade protectionism does not derail the global economic expansion,” he said.

Kamp highlights the momentum in the South African Reserve Bank’s leading indicator continuing to point to a better second half of the year.

However, the tightening of global financial conditions imply countries running macroeconomic imbalances will be placed under closer scrutiny by investors, especially if imbalances reflect a weak fiscal position.

Helmo Preuss in Pretoria, South Africa for The BRICS Post

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