South Africa’s economy is in worse shape than what economists expected – so what now?

 ·3 Mar 2020

The South African Gross Domestic Product (GDP) contracted by 1.4% in the fourth quarter of 2019, data from Statistics South Africa (Stats SA) showed, sending the country into a technical recession.

It was the country’s second recession in consecutive years as power cuts weighed on output and business confidence dropped, Bloomberg reported, while the figure was worse than economists expected.

The median estimate of 12 economists in a Bloomberg survey was for a 0.2% drop in output. The economy contracted 0.5% from a year earlier, the first time in almost four years that GDP has shrunk from the same period a year earlier.

The South African GDP now stands at a miniscule 0.2%, StatsSA said.

“The headline numbers that we are releasing today show that the GDP contracted in the fourth quarter of 2019 by 1.4%. If we compare the fourth quarter with the corresponding period of the previous year, where we saw a contraction of 0.5%. And as we are releasing these results, it’s possible for us to calculate the growth for 2019 in totality to a small figure of 0.2%,” said Stats SA deputy director general for economic statistics, Joe de Beer.

“A fall in both electricity distributed and water consumption pulled overall growth by 4.0%,” StatsSA said.

Bloomberg noted that the contraction means Africa’s most-industrialised economy has had two recessions since president Cyril Ramaphosa came to power at the start of 2018.

According to economists at Momentum Investments, South Africa’s paltry 2019 growth was the weakest since the global financial crisis.

“Growth declined for two consecutive quarters at the back end of 2019, raising a technical recession, with little to suggest that growth will recover strongly in the first quarter of 2020,” Momentum said.

Momentum Investments said that continued heavy load shedding in the first quarter of 2020 and supply-chain disruptions triggered by an outbreak of the coronavirus are likely to weigh negatively on growth in the first quarter of 2020.

“An expected delay in the normalisation of global supply chains and continued load shedding in light of the Eskom maintenance programme has led us to downgrade our growth view from 0.8% for 2020 to less than 0.5%.”

Reza Hendrickse, portfolio manager at PPS Investments, said that the slowdown in the economy 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.

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, said Hendrickse.

“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).”

Hendrickse pointed out that 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,” said the portfolio manager.

“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,” Hendrickse said.

Rate cut on the way?

Bloomberg reported that the latest figures will put additional pressure on the central bank to cut interest rates.

While the MPC’s projection model priced in only one more 25-basis-point cut in the fourth quarter of this year, easing could come sooner and be more aggressive, especially with rate cuts by the US Federal Reserve back on the table because of the impact of the coronavirus on global economic growth, Bloomberg said.

It pointed out that South African MPC member Chris Loewald said last month the Reserve Bank will take into account the virus impact on the global economy at its next rate-setting meeting.

“This will put pressure on the Reserve Bank to cut at the next meeting, especially as the oil price has tanked,” which could lead to further cuts in the fuel price and inflation below the MPC’s estimates, Elize Kruger, an independent economist, said.

“A combination of lower inflation and growth forecasts will paint them in a bit or a corner, especially in terms of the global overlay and virus impact.”

Forward-rate agreements starting in one month fell 4.5 basis points to 6.31% and are now pricing in an 80% chance of a 25-point decrease in the repurchase rate when the MPC announces it decision on March 19.

“A continued string of downside surprises in inflation outcomes and a muted pass through from the currency should allow for further easing from the South African Reserve Bank (Sarb), in our opinion,” Momentum Investments said.

The rand, meanwhile, have up more than a percent to each of the major currencies in afternoon trade on Tuesday:

  • Dollar/Rand: R15.60 (1.42%)
  • Pound/Rand: R19.92 (1.51%)
  • Euro/Rand: R17.31 (1.12%)

Read: South Africa enters technical recession as fourth quarter GDP sinks

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