Lings: SA economy under pressure – How to avoid a Dec downgrade.

The South African economy is under immense pressure, given the recent 1.2 percent decline in first quarter GDP. And while all sectors are in decline, platinum and iron ore the front runners, there is life in business service sector, trade and accommodation, and government. But action is needed to reverse this trend, and help the country avoid junk status come December. Well known economist Kevin Lings finely combs the GDP numbers but then explores some options that may see South Africa sidestep a possible downgrade. It all starts with increased workable public/private partnerships. – Stuart Lowman

By Kevin Lings*

In the first quarter of 2016, SA GDP fell by a significant 1.2%q/q, annualised (seasonally adjusted). This compares with revised growth of 0.4%q/q in Q4 2015. The latest GDP performance was well below market expectations, which was for a decline of -0.1%q/q (STANLIB -0.2%q/q). Over the past year, SA GDP fell by a worrying -0.2%y/y and has averaged growth of only 0.6% over the past four quarters. Although we don’t expect the decline in mining output to be repeated in the second quarter of 2016, we have revised down our growth outlook for 2016 as a whole to 0.0% from a previous estimate of 0.5%. This downward revision takes into account the latest disappointing GDP reading for Q1 2016, but also the recognition that other key sectors of the economy are under increasing pressure.

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At the start of 2016 we highlighted that the risk to our growth forecast is weighted to the downside. Although we have now revised our growth outlook down by 0.5 percentage points, we continue to warn that the risk to the forecast is still weighted to the downside. Hopefully, the current uptick in commodity prices, if sustained, will start to lift mining output somewhat in the quarters ahead. We are also hoping for an improvement in the agricultural sector during the next summer season (Q4 2016) as well as a pickup in spending associated with holding the local government election in August 2016. Nevertheless, the risk of South Africa experiencing an outright recession in 2016 as well as a further sharp rise in the unemployment rate is now relatively high.

During 2015 as a whole, the SA economy grew by a modest 1.3%. This is down from a revised 1.6% in 2014 and 2.3% in 2013. As mentioned above, for 2016, we expect growth of around 0.0%, improving modestly in 2017 to 1.2%. It would appear that South Africa is going to struggle to lift its growth rate meaningfully back up to 2.0% over the next two years given low business confidence, domestic policy constraints and weak global growth.

The decline in GDP during Q1 2016 was largely due to a very sharp decline in mining output (-18.1%q/q), while agricultural production remained under pressure (-6.5%q/q). The weakness in the agricultural sector was largely anticipated given the severe drought conditions that become evident in 2015. However, fall-off in mining was more severe than we had anticipated, and is largely attributable to declines in both platinum and iron production. The fall-off in mining production reduced GDP growth by a very substantial 1.5 percentage points in the first quarter, while the decline in agricultural output reduced growth by a further 0.1 of a percentage point.

In contrast, the business services sectors (which includes the financial sector) grew by 1.9%q/q (contributed 0.4 percentage points to growth), while trade and accommodation rise 1.3%q/q, and the government sector expanded by 1.1%. Overall, it is clear that although some sectors of the economy continue to exhibit positive growth, most industries have experienced a meaningful slowdown in economic activity over the past two years.

The latest GDP growth data confirms that the South African economy has lost momentum over the past two years and remains on the cusp of an outright recession (a technical recession is two consecutive quarters of decline in GDP performance, while an outright recession is a decline in GDP for the year as a whole), hurt by weakness in the primary and secondary sectors of the economy. This is partly due to lower commodity prices, the drought and weak global growth, but it is also due to a systematic deterioration in domestic business and consumer confidence. The fall-off in confidence reflects a combination of factors including an escalation in political tension and increased policy uncertainty. It is especially concerning that since the global financial market crisis in 2009, the rate of economic growth in South African has not managed to gain momentum and has not been robust enough to lead to widespread job creation in the formal private sector.

The public sector is now unable to provide significantly additional stimulus in the form of government spending given their elevated debt levels and the need to be more aggressive in achieving fiscal discipline in order a credit rating downgrade in December 2016. This implies that SA economic policy officials need to find a way to lift business confidence and encourage private sector fixed investment. Realistically, this is most likely to be achieved through a firmer implementation of the NDP, targeted infrastructure development – both hard and soft infrastructure – as well as labour market stability. Government should increasingly adopt a more practical approach to resolving key infrastructural bottlenecks, including the increasing use of private/public partnerships.

  • Kevin Lings, chief economist, Stanlib