SA economy contracts beyond market consensus
After averting a technical recession in the second quarter of 2019, the South African economy contracted by -0.6% quarter-on-quarter in the third quarter of 2019. This was beyond the market consensus of a contraction between 0.0% and 0.4%. The contraction is in line with analyst’s views that the rebound in the second quarter of 2019 was superficial given statistical base implications of the subdued performance figure of -3.2% for the first quarter of 2019.
TRANSPORT SECTOR STIFLES GROWTH IN TERTIARY OUTPUT
The lacklustre third quarter performance was credited to subdued output volumes in the primary (-5.5%) and secondary (-3.8%) sectors which dwarfed broad-based improvements in the tertiary sector — which expanded by 0.9%. While the tertiary sector recorded stronger growth, this was dampened by the transport sector, which contracted by -5.4% in the third quarter of 2019 — the largest quarter-on-quarter decline since 1993. The substantial contraction in the transport sector stemmed from subdued activity in freight and passenger transportation and transport support systems. This partially stifled the rally in the telecommunications sub-sector which has been expanding on the back of global digitisation.
The improvements recorded in the tertiary sector were attributable to increased economic activity in the trade (2.6%), community services (2.4%), finance (1.6%) and households (0.4%) sectors. Higher trade activity was driven by improvements in wholesale, motor trade and accommodation output. The increase in motor trade sales stemmed specifically from an uptick in the foreign demand for motor vehicles (exports) which contributed significantly to the 3.5% increase in export volumes logged for the period.
National Sectoral Overview
As illustrated in the figure below, only four of the 10 broad economic sectors recorded positive growth in 2019:Q3, supported by higher trade, community services, finance and households.
OUTPUT GROWTH IN FINANCE SECTOR FAILS TO SUPPORT EMPLOYMENT GAINS
The recent expansion in the economic output of the finance sector failed to support an improvement in employment figures for the period. According to Statistics South Africa, the finance sector shed -4 000 jobs between the second and third quarter of 2019, and lost -10 000 jobs in the third quarter of 2019 in comparison to the same quarter a year earlier. The shedding of jobs in the sector likely stems from the increase in the adoption of digital technologies brought about by the fourth industrial revolution, particularly in the banking sector. The displacement of jobs is evidenced by the national-wide bank strike that took place on 27 September 2019.
MINING RECLAIMS WILDCARD SECTOR STATUS AS AGRICULTURE SHRINKS FURTHER
Following a revised upsurge of 17.4% in the second quarter of 2019, mining activity recalibrated to its downward that commenced in the fourth quarter of 2017. The sector decreased by -6.1% in 2019:Q3 following declines in the Platinum Group Metals (PGMs), coal and iron ore sub-sectors. The weaker performance over this period is indicative of the cyclical nature of the sector which has had adverse effects on Gross Domestic Product (GDP) for South Africa in the past.
Similarly, agriculture contracted for the third consecutive quarter dipping by -3.6%. Despite the protracted bout of declines, the Agbiz/IDC Agribusiness Confidence Index (ACI) amended moderately by 2 index points to 46 index points for the third quarter of 2019. The upward amendment in respondents stemmed from an improvement in general agriculture conditions, exports volumes and the market share of the agribusiness and employment sub-indices which increased by 11 and 14 index points, correspondingly.
CONSTRUCTION CONTINUES DOWNWARD TRAJECTORY | AMPLIFYING STRUCTURAL IMPEDIMENTS IN THE SECTOR
Meanwhile, construction decreased by -2.7% in the third quarter of 2019. Indicative of the downturn in the sector, the contraction was yet again attributable to subdue performance in residential buildings, non-residential building and construction work. Downbeat figures in construction will likely continue over the medium-term. This is corroborated by the FNB/BER Building Confidence Index, which registered a 20-year trough at 22 index points for the third quarter of 2019. Respondents cited lower demand as the main restraint to growth in the sector, particularly as key industry players offshore their operations and/or applied for business rescue. This has had significant implications for Small and Medium Enterprises (SMEs) in the sector that are generally reliant on larger companies for business. The hold that these large companies have over the profitability of SMEs highlights the structural impediment of the sector that cannot be solely curbed by an uptick in economic growth.
GLOBAL SLUMP WEIGHS HEAVILY ON DOMESTIC MANUFACTURING
The manufacturing sector contracted by -3.9% as output in the basic iron and steel, non-ferrous metal products, metal products and machinery; and petroleum, chemical products, rubber and plastic products sub-sector all edged lower. Further the anaemic performance of the sector is corroborated by the Purchasing Managers Index (PMI) which superficially peaked in July to 50.2 index point (revised down from 52.1 index points in October 2019) only to tumble below the 50-median-point to 45.1 index points in September 2019. Purchasing managers cited the global downturn as a main deterrent to growth in the sector — particularly in relation to the PMI of key trading partners such as the Eurozone and Germany. In addition, the continued uptick in the Purchasing Price Index, continues to erode the purchasing power of manufacturers.
THERE IS LIGHT AT THE END OF THE TUNNEL
Going forward, South Africa’s economic output is expected to improve moderately in the fourth quarter of 2019. This will likely be supported by an uptick in consumption expenditure due to “Black Friday deals” and Christmas spending. However, growth is likely to be overshadowed by the ramifications of the ongoing SAA labour unrest, higher fuel prices in December and the Standard and Poor (S&P) and IMF austerity warnings for the country, particularly regarding trade related economic activity.
Notwithstanding, energy supply in the country seems to have stabilised. This is indicative of in the R 1.3 billion profit declared by Eskom for 6-months ending September 2019 which were underpinned by a considerable increase in international sales volumes. This improvement is likely to bode well with manufacturer’s who have had a dovish stance on the improvement of the sector in the near term. Moreover, general sentiments about the growth prospects for the country remain on the upside as there have been no downward revisions for the country from 2020 onwards. These are likely to be spurred by the official commencement of the Africa Continental Free Trade Agreement in July 2020, however, this may be curtailed by growing protectionism action across a number of African countries.
