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PwC focus on GDP

By: Lullu Krugel, PwC Strategy& Chief Economist for Africa, and Christie Viljoen, PwC Strategy& Economist

Economy contracts 0.6% q-o-q in 2019Q3

Primary and secondary sectors shrink in 2019 so far

Statistics South Africa (StatsSA) reported on December 3 that the South African economy contracted in the third quarter of 2019. Real gross domestic product (GDP) contracted by 0.6% q-o-q compared to a median growth forecast of 0.1% q-o-q amongst local economists. The latest q-o-q decline in GDP was the fourth negative number in the past two years – including the recession during the first half of 2018. High-frequency data warned that the third quarter GDP number would not be good and this raised red flags around the fiscal budget, job creation and sovereign ratings. A year after the first South Africa Investment Conference, the impact of this event appears muted. 

While six out of ten industries contracted q-o-q in 2019Q3, the three largest negative contributors to GDP were mining, manufacturing, and the collective transport, storage and communication sectors. Real mining and quarrying activity contracted by 6.1% q-o-q, with Stats SA previously reporting that production fell 1.6% q-o-q and mineral sales increased by only 1.1% q-o-q in current prices. Factory activity was down 3.9% q-o-q; the Absa Purchasing Managers’ Index (PMI) was below the neutral 50 level during August and September due to weak domestic demand conditions and concerns about the health of the global economy. In turn, freight transport tonnage fell by 0.9% q-o-q in the third quarter due to lower trade volumes and weaker export demand. Positive contributions by trade, catering and accommodation; finance, real estate and business services; general government services and personal services could not overcome these negative trends. 

Graph 1: GDP seesaw continues with fourth negative q-o-q reading in two years

Source: Stats SA

The 0.6% q-o-q contraction resulted in the South African economy being a mere 0.1% year-on-year larger during the third quarter. The economy expanded by only 0.3% y-o-y during the first three quarters of 2019. The country’s primary and secondary sectors both contracted y-o-y during this period, with any growth basically coming from the tertiary (services) sector. The finance, real estate and business services industries remained the beacon of hope and grew by 2.6% y-o-y in the January-September period. These services sectors have been reliable growth drivers for many years. This is partly due to their important role in overall business activity – legal and banking services, for example – as well as the large exposure that many of these companies have to faster-growing internal markets. 

From a broader perspective, meagre economic growth is partly driven by, and adversely influencing, weak business confidence. The RMB/BER Business Confidence Index (BCI) slumped to a 20-year low in the third quarter – “more and more business people participating in the … survey are simply giving up hope” – and remained very downbeat in 2019Q3. At current dismal levels, three out of four business people are pessimistic about operating conditions. A key driver of the weak sentiment are the high levels of uncertainty about key policies: land expropriation without compensation, the National Health Insurance (NHI), prescribed assets requirements, and industry-specific regulations. Economic and political uncertainty has once again increased, according to quantitative analysis by the World Uncertainty Index (WUI), following marked improvement around the appointment of President Cyril Ramaphosa in early-2018. 

Graph 2: Low business confidence and high economic and political uncertainty

Source: BER, WUI

The South African Reserve Bank (SARB) said in November it expects the economy to grow by only 0.5% in 2019. That would be the fifth consecutive year that GDP growth is lower than population growth and the country’s first five-year decline in real GDP per capita since records started in 1960. With the South African economy in its longest business cycle downturn since this data originated in 1945, time is of the essence. The International Monetary Fund (IMF) said in a November 25 statement that “[a] more decisive approach to reform is urgently needed” in South Africa. “Impediments to growth have to be removed, vulnerabilities addressed, and policy buffers rebuilt. Expediting structural reform implementation is the only way to sustainably boost private investment and inclusion,” commented the multilateral organisation.

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