2Q18 GDP confirms technical recession

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Jason Muscat | Senior Economic Analyst | FNB | mail me |


South Africa’s economy contracted by -0.7% qq (seasonally adjusted and annualised) in 2Q18, the second consecutive contraction, which confirmed that the country entered a technical recession in the second quarter.

The print was significantly worse than we had anticipated, but can largely be ascribed to historical revisions that stretched all the way back to 1Q17. While these revisions had no impact on the 2017 economic growth rate, 1Q18 growth was lowered to -2.6% q/q from -2.2% initially.

Growth was dragged lower by five of the ten sectors of the economy, underscoring just how broad-based the weakness is.

Agricultural output fell -29.2% q/q, subtracting -0.8 percentage points (pps) from growth, while transport sector growth fell -4.9% (-0.4 pps). The manufacturing, trade and government sectors contracted by -0.3% q/q, -1.9% and -0.5% respectively, shaving a combined -0.4 pps from the headline number.

The only sectors to make any meaningful positive contribution were mining, construction and finance, real-estate and business services, all of which came off a very weak base. We don’t expect their positive contribution to last. In short, there were very few, if any, positives to take away from the figures.

Furthermore, government does not have the fiscal headroom to add any impetus to growth, particularly as current spending continues to crowd out infrastructure investment. This was borne out by government fixed investment contracting by -2.1% q/q, and SOE investment falling -10.1%, while compensation of employees for the government sector increased by 7.5% y/y – the average for all sectors was 6.6%.

There is also no support coming from the household sector, as household consumption dropped -1.3% q/q, with clothing, transport and recreation spend bearing the brunt of consumers tightening their belts.

Data at hand thus far, including the August PMI and August vehicle sales, suggest that growth for the rest of the year will continue along these lines, and we believe that growth forecasts will inevitably miss on the low side this year, jeopardising tax revenue and fiscal consolidation targets, and in turn, drawing the unwanted attention of rating agencies.


 

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