By: Reza Hendrickse, Portfolio Manager at PPS Investments
The South African economy suffered a further slowdown in the fourth quarter of 2019, shrinking 1.4% compared to the prior quarter. This is worse than what economists were expecting. The third quarter contraction was also revised lower to – 0.8%, with conditions proving worse than previously thought. Now that we’ve experienced two successive quarters of negative growth, the economy is officially in the midst of a technical recession.
Economic output stagnated in 2019, expanding just 0.2% in real terms over the full year. This is less than the South African Reserve Bank’s recently downwardly revised estimate of 0.4%, and National Treasury’s 0.3% estimate. This represents a marked deceleration compared to 2018 where the economy grew 0.8%. Viewed in the global context, Gross Domestic Product (GDP) has grown at a fraction of the pace of the global economy in recent years, with world output having grown 3.6% in 2018 and 2.9% in 2019, according to the International Monetary Fund (IMF).
All three sectors, from primary to tertiary, contracted this quarter. In the primary sector, the mining industry saw a slight rebound on increased PGM, iron ore and gold production. This was however more than offset by lower agricultural production. Manufacturing, electricity and construction all contracted, weighing on the secondary sector, reflecting broad-based weakness in activity levels, impacted by the electricity disruptions. In the tertiary sector, which reflects the services side of the economy, trade, transport and government activity all declined. Even this generally defensive part of the economy showed signs of weakness into year-end.
GDP data is inherently backward looking, and while the trend in recent years has clearly been down, the bar is currently very low for a positive surprise to materialise. Encouragingly, Business Confidence, as a forward-looking indicator, picked up in the fourth quarter, despite growth having slipped, but as the saying goes, one swallow does not make a summer. National Treasury expects growth to average 1% over the next 3 years, but given that we haven’t been able to muster up 1% growth for some time, you would be forgiven for being a sceptic. Fortunately, and it remains to be seen whether Moody’s sees it as such, this year’s Budget was probably more pro-growth than what had been expected, so with a little bit of luck, and against all odds, we may get there after all.