South Africa’s economy – it’s much worse than everyone thought

Domestic growth languished in the first quarter, with the economy shrinking a massive 3.2% – more than double market expectations of 1.5%.

“Higher frequency economic data during the quarter had been pointing to renewed weakness, but conditions have proven far worse,” said Reza Hendrickse, portfolio manager at PPS Investments.

As expected, manufacturing and mining were significant detractors. Local conditions have been hamstrung by the weak consumer, which softer retail sales alluded to, Hendrickse said.

“Downbeat business conditions have weighed on manufacturing and has been evidenced by subdued business confidence, compounded by the electricity supply disruptions experienced during the period. In addition, SA has not been immune to the softer global growth environment, which appears to have impacted areas such as mining this quarter.”

The volatile primary sector shrunk 11.4%, driven by the drop in mining and agriculture, while the drop in manufacturing led the 7.4% contraction in the secondary sector.

“The tertiary sector decline was more muted at 0.7%, and some subsectors, such as Government, Finance and Personal Services were the only pockets of growth,” the analyst said.

The surprisingly steep economic contraction followed two successive quarters of expansion, and worryingly there is little evidence to suggest that the stop-start growth profile will improve materially in the foreseeable future, he said.

The economy grew 0.8% in 2018.

“Growth forecasts for 2019 started at over 1%, but have been progressively trimmed with the potential for further downward revisions. With the first quarter’s poor performance translating to 0% year-on-year growth, it is hard to envisage even 1% growth for 2019,” Hendrickse said.

Economist, Mike Schüssler, said that recent load shedding by Eskom “causes GDP shedding”.

Ian Matthews, head of business development at investment banking firm, Bravura, said that South African exporters are suffering from the inevitable fall-out as trade tensions are escalating between China and the United States (US).

US president Donald Trump announced earlier that tariffs on US$200 billion of goods exported from China to America would increase to 25%. This contrasts with a deal reached between the two countries in February where the US agreed to stick to a maximum of 10% tariffs on goods imported by the US from China.

“Because both China and the US are such big global markets, a trade war between the two is impacting global trade in general but has a harrowing effect on emerging markets such as South Africa,” Matthews said.

Around 10% of South Africa’s total exports are destined for China.

“This is sure to hit the Chinese economy hard which could put South Africa’s trade with China in jeopardy. Slower trade growth, protectionism and technology pose challenges to export led growth strategy. With South Africa being a very small open economy, economic events across the world will adversely affect South Africa.”

Matthews noted that South Africa has already recorded a surprise trade deficit of R3.43 billion in April. The balance of trade is an indicator of the difference in value between a country’s imports and exports and dictates SA’s current account, which is indicative of the country’s trade with the rest of the world.

Analysts had expected the trade account to show a small surplus. “The unexpected deficit shows that South Africa has been hit by waning demand from its main trading partners as well as a deterioration in the terms of trade. Exports decreased by 1.3% from the month before while imports increased by 6.8%,” said Matthews.

Bravura pointed out that as early as May 2018, the Department of Trade and Industry (dti) warned that South Africa would become “collateral damage in the trade war of key global economies”.

Although South Africa is not directly involved in the trade war between the US and China, rising interest rates in the US, is leading to a weaker rand against the US dollar, which will affect the price of imported goods, final manufactured goods such as cars and machinery. It also affects the price paid for crude oil which affects petrol prices negatively, Matthews said.

“Unfortunately for South Africa, the global headwinds of protectionism, trade war anxieties and emerging market risk aversion have already hit investor sentiment.”

The JSE experienced its worst month in May 2019 since October 2018, partly as a result of growing global fears. The JSE fell 4.92% in May. Companies are suffering from escalating wage costs and uncertainty as well as stagnant growth. The South African Rand is also likely to be under continued pressure as the US-China trade war escalates.

It seems unlikely that the rand and other emerging-market currencies will find any significant support pending clear signs of positive developments in the US-China battle, Matthews said.

“The greater performance of the rand will continue to be determined by global factors, and poor local economic data will just make matter worse.”

The rand lost ground against the majors in afternoon trade on Tuesday.

  • Dollar/Rand: R14.69  (1.64%)
  • Pound/Rand: R18.60  (1.68%)
  • Euro/Rand: R16.50  (1.55%)

Looking ahead, Bravura said that the markets are expecting that it will take president Cyril Ramaphosa longer than initially hoped for to root out corruption and implement policy reforms that would stimulate growth in South Africa.

“Given that the South African economy lacks resilience and a stable local foundation, it has now been caught up fully in the emerging market storm. Corporate South Africa and the South African government will have to search together for the best way to weather this storm,” Matthews said.

Read: Rand takes a hit as shock GDP data shows biggest quarterly drop in a decade

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South Africa’s economy – it’s much worse than everyone thought