SA GDP CONTRACTS BEYOND MARKET EXPECTATIONS
SA Economy contracts by 3.2% in 2019:Q1
The South African economy contracted by 3.2% (q/q) during the first quarter of 2019, beyond the market consensus of a contraction of between 1.5% and 2.0%. The 3.2% q/q contraction follows expansions of 2.6% and 1.4% in third and fourth quarter of 2018, respectively.
The writing was on the wall
The contraction in economic activity was foretold by leading indicators such as the business (28), consumer (+2) and building (25) confidence indices that all contracted further during the first quarter of 2019. In addition, the deterioration in the Absa Purchasing Mangers’ Index (PMI) below the 50-point mark since the beginning of the year and downward revision of the 2019 growth forecast by the South African Reserve Bank in May 2019 from 1.3% to 1%, all pointed to the probability of weaker growth over the quarter.
Key industries took a knock over the first quarter
The data revealed that 7 out of the 10 sectors recorded negative growth during the period, resulting in a contraction in all 3 broad sectors — primary (-11.4%), secondary (-7.4%) and tertiary (-0.7%). The government, personal services and finance sectors were the only ones to record growth over the quarter, with the 1.2% growth in government most likely attributable to the build-up to the general elections in May 2019.
Manufacturing output declined by 8.8%
The deterioration in the Absa PMI over the first quarter was mirrored by weaker output in the manufacturing sector, which retreated by -8.8% q/q during the period. This was due to negative growth in 7 of the 10 manufacturing subsectors, particularly, petroleum, chemical products, rubber and plastic products; motor vehicles, parts and accessories and other equipment; and wood and wood products paper, publishing and printing which contributed -1.1% to the decline in GDP.
In addition, the weaker manufacturing activity is further highlighted in the downbeat performance of industries such as mining and electricity, which produce fundamental inputs for manufacturing activity at large. Specifically, contractions were recorded in the mining (-10.8%) and utilities (-6.9%) sectors over the period. Mining production was hampered by weaker production levels in the ‘other’ mining and quarry (inclusive of diamonds) as well as iron ore and coal. This was likely due to the continued slowdown in key markets such as China and prolonged strike action that was only resolved in the beginning of the second quarter of 2019. The decline in the utilities sector stemmed from the protracted bout of stage-4 load shedding during the first two months of the year.
Construction activity contracts for third consecutive quarter
In the same tone, the construction sector continued to remain in the red. The sector contracted for the third consecutive quarter, declining by -2.2% over the first quarter of 2018. The sector’s poor performance was credited to the persistent decline in residential buildings, non-residential buildings and construction works. This is corroborated by the BER’s Construction Building Index that regressed by 7 points between the last quarter of 2018 and the first quarter of 2019, to register at 25 — the lowest confidence level in 8 years. The decline in confidence chiefly stemmed from weaker sentiments by manufacturers and hardware retailers that participated in the survey. Furthermore, several construction giants (including Group Five) have faced several challenges and gone into business rescue or closed-down completely. The slowing performance of the sector reveals the need for an increase in both public and private expenditure, specifically on infrastructure, projects to spur growth. An increase in appropriate infrastructure projects, particularly, in relation to global value chains will not only improve the performance of the sector but will stimulate inclusive growth in the country.
Agriculture hit by lower field crops and horticultural products
Other contractions were observed in agriculture (13.2%), trade (-3.6%) and transport (-4.4%) activity. The decrease in agriculture was due to a drop in the production of field crops and horticultural products. Sentiments from the latest AgriBiz Confidence Index points to a slight improvement in sentiments with the industry player anticipating an improvement in horticulture and livestock in the medium term.
The decline in trade activity was due to the subdued performance of the wholesale, retail and motor trade subsectors which partly explains the corresponding contraction in household expenditure of -0.8%. Lower levels of household expenditure were driven by declines in the demand for clothing and footwear (-12.7%), recreation and culture (-4.0%) and transport (-3.1%) during the first quarter of 2019. Conversely, the household expenditure on necessities such food and non-alcoholic beverages and housing services which increased by 1.5% and 1.2% q/q, respectively. This is aligned with overall weaker consumer sentiments observed over the period, that have translated in the view that purchases of durable goods would be unsuitable. This was evidenced by the decline in the expenditure on durable (-5.8%) and semi-durable (-10.5%) goods for the quarter.
Not all doom and gloom as Community services, Finance and Household record growth.
Gains were observed in the community services (1.2%), finance (1.1%) and households (1.1%) sectors.
Despite improved consumer sentiments about the economic outlook for the second quarter of 2019 — FNB/BER Consumer Confidence Index improved from 0 points to 11 points in 2019:Q2 — the overall economic outlook remains bleak in the medium-term. This is attributable to higher administer prices and fuel levies coupled with added fuel-price pressures following the introduction of the Carbon Tax on 1 June 2019. Weaker confidence in growth prospects going forward is supported by the latest business confidence numbers that registered a decline in 4 out of the 5 sectors surveyed. The largest declines in confidence were observed in the confidence of businesses operating in the building, retail, wholesale and manufacturing sectors that have all recorded sluggish performance figures in preceding quarters. The slump in manufacturing production is further supplemented in the figures of its leading indicator — the Absa PMI. After gaining moderately in April 2019 to 47.2 points the seasonally adjust Absa PMI shed 1.7 points in May to register at 45.4 points.
