South Africa’s GDP numbers are much better than expected. In fact, the 66% quarter-on-quarter, seasonally adjusted, annualised figure is better than even the best industry expectation, said Maarten Ackerman, chief economist and advisory partner at financial services company, Citadel.
The local economy saw a rebound in Gross Domestic Product (GDP) during the third quarter of 2020, data from StatsSA showed on Tuesday (08 December). GDP increased by 66.1% quarter-on-quarter annualised (seasonally adjusted).
The 13.5% growth for the quarter was the first positive return after four negative quarters.
“It has definitely been a positive surprise which has been well received by the market as we can see from the positive movements in the rand exchange rates as well as the bond market,” said Ackerman.
“However, it is important to understand that this number is the result of a very specific cocktail. Unpacking this, the first ingredient is obviously the fact that we are measuring the growth off a very, very low base because GDP more than halved in the previous quarter.
“We are now measuring from that lockdown pullback and comparing it to the economy opening up. As a result, we see an extremely strong rebound number.”
As an example, looking at restaurants over the period, the sector is up 7,000%, which clearly demonstrates the importance of putting the growth into perspective. Going from being closed and at rock-bottom, to suddenly reopening for business has resulted in a massive base effect, which is visible in these numbers.
The second ingredient in the cocktail lies the fact that not only has South Africa opened up but our trading partners and the rest of the world have too – a welcome tail wind, the analyst said. “We can then drop into the cocktail the fact that we have been blessed with fewer load shedding days, which means no further hampering of the economy.”
Each of these factors has played a role in contributing to the better-than-expected growth, Citadel said.
Currently, the year-on-year growth number is -6%, which still indicates the severity of Covid-19 and the impact of the lockdown.
“We can safely assume further positive growth – upper single digit is most likely – for Q4 2020, but with a far weaker base effect. This would result in a total number for 2020 of closer to -7.5% as a result of the earlier negative growth followed by the lockdown.”
Ricardo Smith, investment strategist at Absa Global Investments & Solutions said that the impact of the Covid-19 pandemic are two-fold; on the short-term, losses have experienced in income and revenue as a result of trade restrictions.
On the longer term, the consequence has been business liquidations, structural unemployment levels and deteriorated debt levels. “We therefore expect the economy to continue on its recovery path as the spread of the virus is curbed; however, we continue to expect economic growth to be below full economic potential until structural reforms occur,” said Smith.
He warned that the second wave of infections and the consequent policy response, remain the single largest threat to economic recovery in 2021. “Should a second wave of infection fully ensue, it will be a tough balancing act between fiscal and economic reform and curbing the spread of the virus once more.”
The Bloomberg median expectation is for the South African economy to contract by 8.1% in 2020 before recovering to register positive economic growth of 3.8% and 2.0% in 2021 and 2022 respectively.
Every sector grew … some more than others
All three super-sectors saw growth with the primary and secondary sectors, which were more constrained by the lockdown, seeing massive contributions to the growth of the economy (up 172.9% and 155.6% respectively), noted Citadel.
There was also a significant contribution by the tertiary sector (up 37.6%) although to a lesser extent, likely because this includes many of the essential services which were open during lockdown.
The best contributors were Mining, Manufacturing and Trade, which is clearly a reflection of those industries getting back to business after the lockdown and the opening of the global economy.
Even agriculture which, as an essential service, had been the only sector to grow during the first two months of lockdown, posted a very creditable 18.5%.
“Coming off an already high base and with good crops being reported, it is comforting to see that agriculture can show such strong positive growth. An added bonus lies in its job creation ability,” said Ackerman.
Expenditure on GDP topping two-thirds growth
The consumption side of the economy was up almost 68% quarter-on-quarter, seasonally adjusted, annualised.
Looking deeper, the biggest contributor was the export sector which is a reflection of the economy opening up, ports opening up and the rest of the world getting back to business.
“We expect that number will carry over into Q4, again given the massive base effect, but we need to bear in mind that in Q4 we have seen a second wave in many parts of the world with partial lockdowns having been implemented again, so some caution is advised,” said Ackerman.
Citadel said that it is encouraging to see household expenditure up almost 70%. “Given the many job losses that the economy has suffered, it is comforting to see that consumers are also rebounding.”
Restaurants and hotels have performed particularly well as the economy has opened up, it said. Alcohol and tobacco have also done extremely well as the ban on those products has been lifted. Most other consumer goods have generated solid numbers.
Those industries which were already positive in the second quarter have seen smaller increases in the third quarter – such as utilities, communication and education – but they remain in positive territory.
A very small contribution from government expenditure which will help address the fiscal situation is also pleasing in this environment.
Imports slipped by 1.6%, reflecting lower imports of textiles, chemical products, prepared food stuffs, beverages and tobacco products. “To unpack that a little bit further, it’s not just a reflection of a weak consumer. Lower textile imports is a result of the push to bring textile manufacturing back home to South Africa.
“Many of the clothing retailers are pivoting towards locally produced clothes again, to diversify the supply chain and opting not to rely totally on Asia. This is therefore a positive, and more permanent, decline that Citadel has noticed in that sector,” Ackerman said.
Gross Fixed Capital Formation is up 26%, again coming off of a very low base of -59.8% in Q2. “It is always encouraging to see a good number on this front because that is the first step that the economy needs to take to generate productive capacity which will pave the road for better growth in future.
“This number has historically been more negative than positive, which is a reflection of the structural issues and policy uncertainty facing the country. One can only hope that by addressing corruption, paired with some policy reforms, this number will not be just a reflection of the base but rather that we are going to see more positive growth in quarters to follow,” Ackerman said.
“Our discussions with the National Treasury highlight the difficulty in wage negotiations. Compensation of employees has increased from 32% of revenue in 2007 to a near 46% in 2019 compared to social benefits at 15%,” said Rukayat Yusuf, sub-Saharan Africa economist and strategist at Bank of America (BofA) Global Research.
“We see increasing likelihood that the Labour Appeals court rules in favour of unions, demanding R37bn in FY20 wage increases. Treasury has proposed a R27bn settlement offer but this would still imply upside to our consolidated deficit projection, currently at 15.9% of GDP.
“We expect Treasury will have more flexibility in the new FY21-23 wage agreement although a compromise outcome is most likely amid strong union pushback.”
It might look rosy, but don’t be fooled
In summary, Citadel said that the print is positive and might help to generate a better growth rate for the whole year but, at -7.5%, “we are still expecting a relatively high negative number for 2020 overall”.
“What this does do is pave the way for rebuilding the economy, however we must not lose sight of the fact that we still need to see the structural issues being addressed. From the fiscal cliff that we are facing to the government wage negotiations, things continue to look bleak and policy reform remains as urgent as ever.”
If the country can address the structural issues, turn Eskom around and continue along this path, then 2021 can be a year when we produce at closer to potential capacity – maybe even above capacity – growth but it is all about the sustainability of that growth.
“We need to reach a point of positive, sustainable growth going into 2022, before we will be able to gather momentum to support and address issues such as the deficit and unemployment.
“We are facing a crucial phase of executing reforms,” said Ackerman.
Citadel said that the good news is that the economy is doing better than forecast.
“The bad news is that we still have an enormous way to go and a massive amount of work to do to get there. We cannot give up on addressing our structural issues, implementing policy reforms and rooting out corruption,” said Ackerman.
“Going forward the growing concern is the possibility of a second wave of infections and the policy that will be required should this manifest. With the prospect of a number of vaccines being approved across the world it may be a matter of time before we see industries return to their full capacity and a normalisation of growth levels in South Africa,” said Luigi Marinus, portfolio Manager at PPS Investments.
Bank of America’s Yusuf said: “We expect the momentum likely slowed sharply in Q4, but nonetheless estimate the 2020 recession is now tracking closer to -7% relative to our baseline at -8.1%.”
She said that daily Covid-19 cases are rising, but fatality rates are low with a return to hard lockdowns unlikely. “We continue to project a 2.9% rebound in 2021, reflecting a base-effects bounce as well as improving global and domestic demand (2022: 1.5%).
“SARB should find comfort in the recovery while watching the second wave and fiscal trajectory. We therefore see rates unchanged at 3.5% through 2021 with headline inflation benign at 3.7% in 2021 and 4.2% in 2022.”