04 Sep 2017

GDP Update: Economy lifts out of a technical recession in Q2.17 but underlying growth dynamics remain weak

Figure 1: GDP sector performance in Q2.17
  • SA’s Q2.17 GDP update confirmed that the economy lifted out of the technical recession, with (production side) growth rising 2.5% quarter on quarter seasonally adjusted annualised (qqsaa) versus -0.6% (revised from -0.7%) qqsaa in Q1.17 and -0.3% qqsaa in Q4.16. The Q2.17 outcome was slightly stronger than market expectations of 2.3% qqsaa.
  • In Q2.17, eight of the ten sectors registered growth (see figure 1). The largest contributions of 0.7% and 0.5% stemmed from the agriculture and finance sectors.
  • Agriculture output lifted for the third consecutive quarter in Q2.17, on favourable weather conditions in the maize producing regions of the country.
  • The finance sector, which makes up 20.1% of GDP, had experienced the first contraction in activity since the 2008/09 recession in Q1.17. Q1.17 can be afflicted by seasonality. Activity recovered in Q2.17 with Stats SA noting increased activity for financial intermediation and auxiliary activities.
  • The utilities sector added 0.2% to GDP “largely due to an increase in electricity consumed and produced and water available for distribution” according to Stats SA.
  • In Q2.17 the manufacturing sector staged a modest recovery following three consecutive quarters of contraction whilst the trade sector lifted from a surprise contraction in Q1.17.
  • However, in both cases the actual manufacturing production and retail sales figures were relatively strong at 6.1% qqsaa and 8.7% qqsaa but their contributions to GDP were much smaller than suggested by these figures. As the contributions to GDP measure value added rather than actual production and sales, the smaller contributions likely reflect limited pricing power at the manufacturing and retail level, highlighting the weak demand conditions.
  • For the year as a whole GDP is forecast to average only 0.5% y/y compared to 0.3% y/y in 2016. SA’s performance diverges from the synchronised global economic upswing. Global confidence, industrial production and trade indicators all confirm a sustained strengthening of the global cyclical recovery.
Figure 2: SA versus global GDP growth
Figure 3: Confidence and policy uncertainty
  • The expenditure approach to measuring GDP yielded an increase of 2.4% qqsaa in Q2.17, following a contraction of 0.7% qqsaa in Q1.17 and -0.1% qqsaa in Q4.16.
  • Household consumption expenditure growth rebounded to 4.7% qqsaa from a decline of 2.7% qqsaa in Q1.17. The moderation in CPI inflation to 5.3% y/y in Q2.17 from 6.3% y/y in Q1.17 will have provided some support to consumer spending in Q2.17. However, we project household consumption expenditure to remain subdued in 2017 at 1.0% y/y compared to 0.8% growth in 2016 as households remain highly indebted, credit extension is particularly modest, job prospects in both the government and private sector are weak and depressed consumer confidence will continue to affect the willingness to spend.
  • After expanding for two consecutive quarters, gross fixed capital formation declined by 2.6% qqsaa in Q2.17 on account of a contraction in private sector investment, which comprises two-thirds of total investment. The 6.9% qqsaa decline in private sector investment and the 3.1% qqsaa fall in investment by public corporations outweighed the effect of the 12.4% qqsaa increase by general government.
  • In Q2.17, the highest growth, of 14.4% qqsaa, was recorded for exports, mainly on exports of vehicles and transport equipment, base metals and precious metals. Imports increased by 13.3% qqsaa on machinery and electrical equipment.
  • A low economic growth environment will remain entrenched by the depressed business and consumer confidence levels that have been linked to perceived heightened policy uncertainty and perceptions of weakening governance (see figure 3).
  • At its July MPC meeting the SARB noted that “(i)t is unclear where the drivers of accelerated growth will come from in the absence of credible structural policy initiatives that will reduce uncertainty and increase business and consumer confidence.”
  • At the same meeting, the SARB lowered its GDP forecasts to 0.5% for 2017 from a prior 1.0%, with 2018 and 2019 GDP forecast at just above 1.0%, with risks assessed to be “slightly on the downside”.
  • The Q2.17 GDP data is unlikely to hold much bearing on the SARB’s upcoming MPC meeting on the 21st September owing to its historical nature. The Committee is likely to remain focused on the prospects for and risks to inflation and growth.
Figure 4: GDP sector performance in Q2.17 (expenditure approach), qqsaa
Figure 5: Seasonally adjusted, annualised and annual real growth rates (%) respectively
Figure 6: Seasonally adjusted, annualised and annual real growth rates (%) respectively Q1.16 Q2.16 Q3.16 Q4.16