SA recovers from recession in 2017Q2
Best y-o-y GDP growth in two years
Statistics South Africa (StatsSA) reported on September 5th that the South African economy expanded by 2.5% quarter-on-quarter (q-o-q) during the second quarter of 2017. This followed two quarters of decline in real GDP which pushed the economy into a recession. The expansion seen during 2017Q2 was larger than the 2.1% q-o-q projected by local economists on the back of an unexpectedly strong recovery (+4.7% q-o-q) in final household expenditure. This helped real retail sales rise by 2.1% q-o-q during Q2. StatsSA’s GDP report can be viewed here.
The second quarter witnessed q-o-q growth in activity in eight out of the country’s 10 industries. The agricultural sector (+33.6% q-o-q) continued the rain-fed rebound seen in the first quarter and accounted for almost a third of the overall gross domestic product (GDP) growth seen in the second quarter. The manufacturing industry (+1.5% q-o-q) also emerged from its two-quarter recession. In turn, real activity in government services and construction (also strongly influenced by public spending) contracted by 0.6% q-o-q and 0.5% q-o-q, respectively.
Following the q-o-q recovery in economic activity during 2017Q2, real GDP was 1.1% year-on-year (y-o-y) larger in the second quarter. This was the largest y-o-y expansion in two years as only the manufacturing (-1.5% y-o-y) and trade, catering & accommodation (-1.1% y-o-y) sectors remained below last year’s activity levels. StatsSA recorded a 1.1% y-o-y rise in real consumer spending during the first six months of the year despite downbeat consumer confidence readings. Admittedly, most of this was in the food and beverages sectors, with semi-durable and durable goods sellers not seeing much of the benefit.
Considering the third quarter so far, the Standard Bank South Africa Purchasing Managers’ Index (PMI) – an indicator based on the surveyed views of purchasing executives in private sector companies – declined from 50.1 in July to a lower-than-expected 49.8 in August. Both readings were very close to the 50 level suggesting a stagnant private sector during the first two months of the third quarter. On a positive note, the survey showed that employment increased at the fastest rate since January, helping businesses reduce their volume of outstanding orders.
GDP growth averaged 1.05% y-o-y in the first half of 2017. The International Monetary Fund (IMF) said in July it expects local economic growth to recover from 0.3% last year to 1% in 2017. The latter will still be below the rate of population growth of around 1.4%. Finance Minister Malusi Gigaba warned on June 9th that there are “significant risks” towards achieving government revenue goals this year due to still-low economic growth expectations. He said that the prospect of “sustained low growth over the medium term” remains the greatest risk to fiscal policy objectives and limits the government’s ability to generate more revenue.
From the monetary side, consumer price inflation declined from levels above 6% y-o-y for most of the January 2016 – March 2017 period to 4.6% y-o-y in July. The benchmark food basket cost only 6.8% y-o-y more in July compared to readings above 10% y-o-y between April 2016 and February 2017 as good summer rains and higher plantings boosted agricultural prospects. Due to favourable inflation conditions, the SARB Monetary Policy Committee (MPC) was able to reduce the country’s prime interest rate by 25 basis points to 10.25% during late-July. This will be supportive of household finances.