SA ECONOMY AVERTS RECESSION IN 2019Q2 | WILD CARD SECTORS PULL THROUGH
The South African economy expanded by 3.1% quarter-on-quarter (q/q) in the second quarter of 2019, following a revised 3.1% contraction in the preceding quarter (2019: Q1). Averting a technical recession such as the one that registered in the first half of 2018 where the South African economy contracted by -2.7% and -0.5% in the first and second quarters of 2018, respectively.
LOW BASE | SUPERFICIAL GROWTH
The rebound in economic activity slightly exceeded the upper bound of market consensus by 10 basis-points, that ranged between 1.8% and 3%. This was attributable to statistical base effect that were propelled by consistent electricity supply during the second quarter of 2019 that superficially inflated growth. The inflated growth figures are corroborated by modest growth rate of 0.9% year-on-year (y/y) when comparing the performance of the economy in the second quarter 2019 with the second quarter of 2018. In addition, to depressed leading indicators such as the business (28), consumer (+2) building confidence indices and the ABSA Purchasing Managers’ Index (April:47.2, May: 45.4, June: 46.2) for the second quarter of 2019.
Data Source: Statistics South Africa
WILD CARD SECTORS ON THE UPSIDE
Growth for the period stemmed from stellar output figures in seven (7) out of the ten (10) sectors, notably in the wild card sectors such as mining (14.4%) and manufacturing (2.1%) that account for 21% of the nation’s Gross Domestic Product (GDP). This consequently led to an improvement in all 3 broad sectors — primary (9.7%), secondary (1.5%) and tertiary (3.0%).
The expansion in mining output was credited to improved iron ore and manganese ore production and the rally of gold and platinum prices. Gold price reached highs that were last registered in the commodity super cycle of 2014. In addition, the increase in labour productivity following the end of a protracted bout of strikes in the gold and platinum subsector and stead electricity supply supported improved output figures for the second quarter of 2019. Similarly, the improvement in electricity supply bolstered manufacturing output for the period, albeit superficially. Manufacturing activity was underpinned by an increase in the production of food and beverages, basic iron, steel and machinery and motor vehicle parts.
Other gains were observed in finance (4.1%), trade (3.9%), community services (3.4%), utilities (3.2%) and households (0.8%) sectors.
Data Source: Statistics South Africa
FINANCE LOSSES JOB CREATION STEAM
The finance sector logged its highest growth rate since the first quarter of 2015, however, registered relatively significant (-21 000) job losses during the period. The divergent growth figures likely infer to increased non-labour related efficiencies due to the interconnectedness of the sector to global value chains that transcend geographical borders. On the other hand, the increase in community services was attributable to the seasonal uptick in activity in the sector due to the elections that were held in May 2019.
HOUSEHOLDS EXPENDITURE FUELLED BY SENTIMENT
While, gains in trade related economic activity was driven by an improvement in wholesale, retail, motor trade sales and accommodation services. The increase in trade sales is supplemented by household expenditure figures of 2.8% for the same period, following a -0.6% contraction in the preceding quarter. Gains were observed in all household expenditure sub-categories, with the exception of restaurants and hotels (-3.8%). Notably, purchases of durable goods increased despite FNB/BER consumer sentiments for the appropriateness to buy durable goods regressed from -8 points to -10 points in the second quarter. Notwithstanding, the improvement in trade figures is aligned with overall economic outlook sentiment that rose from 0 points to 11 points in the second quarter of 2019.
Conversely, contractions were registered in agriculture (-4.2%), construction (-1.6%) and transport (-0.3%).
Despite improved winter crop yield, agricultural production was hampered by the Chinese ban on wool imports (that has since been lifted) and forecasted delayed in summer grain and oil seed production. This among other reasons, subsequently led to regression in the AgBiz/IDC Agribusiness Confidence Index by 2 points to 44 points for the second quarter of 2019.
CONSTRUCTION CONTINUES TO DEMOLISH ANY GROWTH PROSPECTS
Unlike the mining and manufacturing sectors, the construction sector was unable to rebound on the basis of a depressed based. The construction sector for the fourth consecutive quarter to register at -1.6%. The lacklustre figures stemmed from sluggish output figures in non-residential buildings and construction works. Notwithstanding the downward trend in construction output figures, the FNB/BER building confidence index increased by 4 points to registered at 29 points for the second quarter of 2019. This was due to improved sentiments in four (4) out of the 6 (six) sub-sectors reviewed, particularly among architects and quantity surveyors that are in the beginning of the construction value chain. However, 70% of the respondents of the survey were discontented with current business conditions citing the “buyers’-market boom” and the high occurrence of office space and shopping centre vacancies. This is indicative in construction giant Wilson Bayly Homles-Ovcon (WBHO) that revealed that headline earnings per share had decrease by 34% to 932 cents per share for the financial year ending 30 June 2019.
The outlook for the economy remains moderate for the reminder of the year, as the economy has recalibrated back to its original status quo which is hampered by structural impediments. This alongside increases in municipal tariffs from July 2019, substantial trade deficit in July of R2.88 bn. for July 2019 and low purchasing managers sentiments of 45.7 points for August and the upsurge of the US-China trade war could stifle growth prospects going forward. However, suppressed consumer inflation currently at 4% and the interest rate cut of 25 basis points to 6.5% on 18 July 2019 can somewhat soften the hard landing the economy is poised with for 2019.
