The recession is over – switch on the lights

Maarten Ackerman

By Maarten Ackerman, Chief Economist and Advisory Partner, Citadel

With a positive growth figure of 2.2% for the third quarter of 2018, the technical recession is over. We can now switch on the lights and, hopefully keep them turned on, given the issues we’re experiencing with electricity.

The level of growth achieved is roughly in line with market expectations of 1.9% to 2.0% (quarter-on-quarter, seasonally adjusted annualised), and the currency has indicated that the forex market approves of the improved growth figures, with the rand immediately gaining 10 cents after the release of the data.

Importantly, if there is stronger growth, and if it can continue, it will serve to improve South Africa’s fiscal situation, which is positive for the local bond market and implies that interest rate hikes will be moderate.

Manufacturing and agriculture on the rise

The economy was bailed out by the manufacturing sector with a massive increase of 7.5%, which is really encouraging to see. This was, to an extent, already confirmed yesterday by the Purchasing Managers’ Index (PMI) figures, which rose from 42.4 in October to 49.5 in November.

Agriculture, after two very negative quarters, is also up 6.5% and together, these sectors represent the two main contributors to the economy’s strong performance over the past quarter. Furthermore, it is important to note that growth in manufaturing and agriculture is particularly positive for the economy, as these sectors are key to creating more inclusive growth and jobs.

In more good news, we also saw a strong contribution from transport, trade, finance and even government, while the only major detractor from growth was the primary sector, with mining down 8.8%.

On the downside, however, this level of decline in mining is a concern as it points to some of the structural issues that the mining sector is facing. The 2.7% drop in construction and 5.1% decline in Gross Fixed Capital Formation is also of some concern, pointing to a lack of investment in future capacity.

SA’s economic prospects moving forward

On a more positive note, it was encouraging to see that household expenditure had risen by 1.6% quarter-on-quarter, most of which was spent on semi-durable goods. This points to the fact that South African consumers are not yet down and out, despite the financial challenges of higher fuel costs, increased VAT and a high unemployment rate.

Combined with the welcome news that consumers will see a R1.84 cut in the petrol price this month, this is likely to mean increased business and consumer confidence moving into the festive season, which in turn should further boost the final quarter’s GDP figures.

However, while the economy grew by 1.1% year-on-year, the reality is that as long as economic growth remains below population growth of some 1.6%, the country will continue to see a decline in GDP per capita. To create inclusive growth and address key issues of poverty and unemployment, South Africa needs to see GDP growth of 3% as a bare minimum.

Despite the positive growth seen this quarter, it will also remain a challenge for South Africa to achieve the 0.7% economic growth for 2018 forecast within the October MTBPS speech. With negative GDP growth of 2.6% and 0.4% in the first and second quarters respectively, we would still need a very strong final quarter to meet government’s expectations.

This said, the strong growth seen in the third quarter is a step in the right direction, and with a continued focus on policy reform and implementation, we should hopefully see government’s labours slowly start to bear fruit in the near future.

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