06 Jun 2017

GDP Update: Economy falls into a technical recession for the first time since 2008/09

Annabel Bishop

Chief Economic

Contrary to market expectations of a mild lift in GDP in Q1.17, the economy experienced a technical recession, with a decline of 0.7% quarter on quarter seasonally adjusted annualised (qqsaa) after a fall of 0.3% qqsaa in Q4.16. The last recession was recorded in 2008/09, during the global financial crisis.  

GDP Update

In Q1.17, the deterioration in economic activity was broad based with eight of the main ten sectors experiencing contractions (see figure 1).

The largest negative contribution of 0.8% was derived from trade sector, which comprises 13.7% of the economy. This performance reflects the effects of depressed consumer confidence, elevated unemployment, subdued rates of household credit extension and higher interest and tax rates.

The manufacturing sector experienced a contraction in activity for the third consecutive quarter in Q1.17. With the sector comprising 12.3% of GDP, the negative contribution totalled 0.5%. The underperformance of the manufacturing sector is linked to weak domestic demand.

The finance, real estate and business services sector which makes up 20.1% of GDP, experienced the first contraction in activity since the 2008/09 recession, with a negative contribution of 0.2%. Stats SA noted decreased activity for financial intermediation.

The utilities sector detracted 0.1% from GDP “largely due to decreases in electricity produced in the first quarter. The amount of water distributed decreased, mainly driven by continued water restrictions in some parts of the country still recovering from the drought conditions”, according to Stats SA.

Only the agriculture and mining sectors registered growth in Q1.17, yielding positive contributions of 0.4% and 0.9% respectively. The dissipation of the drought in most of the country and higher commodity prices supported increased activity in the agriculture and mining sectors respectively.

Economic growth is still expected to lift in 2017, from 0.3% in 2016, but only very modestly. The economy should derive some support from the positive momentum in global economic activity and commodity prices. However, the extent of recovery in GDP growth is expected to be curtailed by persistently depressed business and consumer confidence, which in turn will continue to manifest in weak private sector fixed investment and household consumption expenditure (see figures 2 and 3).

GDP Update
GDP Update
GDP Update

The expenditure approach to measuring GDP yielded a decline of 0.8% qqsaa in Q1.17, following a contraction of 0.1% qqsaa in Q4.16.

The largest negative contribution, of 1.4%, stemmed from the decline in household consumption expenditure (see figure 4). Although slowing inflation should provide some relief to the household financial position in 2017, a meaningful rebound in consumer spending is likely to be restricted by the tax increases announced in the 2017 Budget.

Government consumption expenditure also declined in Q1.17, deducting 0.2% from GDP, on a “decrease in employment numbers.”

Gross fixed capital formation expanded for the second consecutive quarter by 1.0% qqsaa after a 1.7% rise in the preceding quarter. The lift stemmed from increased fixed investment expenditure by general government and the private sector, with fixed investment by public corporations contracting for the third consecutive quarter.

The private sector accounts for two-thirds of total fixed investment in the economy and the 1.2% qqsaa increase in Q1.17 follows five consecutive quarters of contraction. In view of the recent political developments and subsequent sovereign credit rating downgrades, the recovery in private investment may not be sustained into the subsequent quarters. Perceived heighted levels of policy uncertainty will likely see business confidence take longer to recover from depressed levels, which suggests that private investment rates will remain suppressed.

Low GDP growth remains a sovereign credit rating weakness, owing to the associated fiscal consolidation risks. SA’s economic growth has underperformed the emerging market aggregate and remains vulnerable in the event of a renewed weakness in the global economy or a downturn in commodity prices.

GDP Update
GDP Update