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South African final demand rose in the fourth quarter
March 4, 2020, 5:18 pm

Load shedding however meant that production could not keep up

The bad news from a government revenue point of view is that the nominal growth in GDP, on which taxes are based, eased to 4.2 per cent in 2019 from 4.7 per cent in 2018 [PREUSS]

Economists around the world look at real final demand to gauge the strength or weakness of an economy, although non-economists tend to get caught up in the headline gross domestic product (GDP) figure. That is why the South African rand weakened after worse-than-expected fourth quarter 2019 GDP headlines hit the trading screens, even though real final demand rose by 2.1 per cent quarter-on-quarter (q/q) at a seasonally adjusted annualized (saa) rate.

The headline GDP data as measured from the production side showed a 1.4 per cent q/q saa contraction as rotational power blackouts, known as load shedding in South Africa, impacted production. The constrained ability to produce meant that the goods producing sectors such as agriculture, manufacturing and construction all suffered quarterly contractions and that had a spillover effect into the trade and transport sectors.

The only sectors that showed a quarterly increase in the fourth quarter were personal services, financial services and somewhat surprisingly, mining.

In line with the government’s commitment to reduce the number of civil servants, many contracts of temporary staff at universities and other institutions were reduced with the result that government services also contracted in the fourth quarter.

As production could not keep pace with the positive demand there was a large R40.3 billion drawdown of inventories in the fourth quarter of 2019, with most of the inventory depletion taking place in the mining industry and trade.

The fourth quarter 2018 inventory drawdown was the largest for quarterly data going back to 2010. The previous largest drawdown was in the second quarter 2016 when the constant 2010 rand reduction was R37.4 billion. The inventory drawdowns lead to wild swings in gross domestic expenditure (GDE).

In the second quarter 2016 the drop was 4.1 per cent followed by a 5.7 per cent increase the subsequent quarter as inventories are replenished. In the fourth quarter 2018 GDE plummeted by 6.8 per cent. In the fourth quarter 2019 GDE fell by 4.4 per cent q/q saa.

On an annual basis, GDP as measured from the production side only grew by 0.2 per cent, the same growth rate as final demand as household consumption, which accounts for 62.2 per cent of GDP, eased to a 1.0 per cent rise in 2019 from a 1.8 per cent gain in 2018.

The bad news from a government revenue point of view is that the nominal growth in GDP, on which taxes are based, eased to 4.2 per cent in 2019 from 4.7 per cent in 2018.

The good news is that prospects for 2020 were looking good prior to the global panic resulting from the coronavirus outbreak.

The maize crop was expected to be 29 per cent larger this year, which should boost agriculture, while citrus exports were forecast to be 10 per cent larger. Government revenue jumped by 15.1 per cent y/y in January after only a 2.2 per cent y/y rise in December.

Now unfortunately, forecasts are necessarily murky, as production managers brace for the disruption caused by the quarantine in China. Automobile production managers have been pro-active and imports of original equipment components surged by 169 per cent m/m in January.

Helmo Preuss in Pretoria, South Africa for The BRICS Post