The Road Ahead Is Still Long – The GDP growth figures for the fourth quarter of 2018 are encouraging given the tough environment we are emerging from. Given that we emerged from a technical recession in 2018, seeing positive growth for the full year is an encouraging turnaround. While it may not yet be enough to solve many of our structural problems, positive signs could keep rating agencies alive.
However, whether you look at 1.4% quarter-on-quarter, adjusted annual growth in the fourth quarter of 2018, or 0.8% growth in 2018, they are well below the population growth rate. Worse, employment growth does not mean that employment cannot be sustained even if the population is growing faster than the economy. Ultimately, this means the unemployment rate will continue to rise.
The Road Ahead Is Still Long
That said, things are definitely looking up based on the latest GDP figures. Noteworthy is the 4.5% increase in manufacturing, one of the key sectors of the economy that supports productivity growth and more job creation. It contributed 0.6 percent to the GDP growth.
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The transportation, storage and communication sector performed best, growing 7.7 percent, accounting for half (0.7 percent) of the country’s 1.4 percent growth, mainly on the back of growth in surface transportation and transportation support services.
The agriculture sector also showed relatively good growth, although it contributed 0.2% of the total to the smaller size of the economy, growing by nearly 8% in the quarter. It accounts for about 2% of the economy and production numbers are highly volatile.
Farm base was very low in 2016 and then turned into a very high base in 2017, which worked through the first two quarters of 2018. This partly contributed to the two negative quarters we saw at the start of 2018, which means we’ve made it through. A technical withdrawal was made last year. This is another step back from this level.
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The concern in 2019 is that agriculture is unlikely to contribute as much as we are still in the dry season. As only 60% of the crop has been harvested this year, the sector’s output is expected to drop sharply in the coming months. Farmers plant less due to difficult operating conditions, seen as exacerbated by the uncertainty surrounding the land question.
Although we have reduced GDP, we see a positive 0.6% slide in general government services this quarter, as the government has shown a decline in employment. This is consistent with the decline in public sector employment seen in the Q4 2018 Labor Force Survey numbers and shows that the government is well aware of the public wage bill problem and the need to reduce its numbers.
Worryingly, the mining sector, which accounts for 7% of the economy and is a major employer, saw a 4% drop in output during the quarter. The mining sector was the biggest loser in growth, falling 0.3% compared to GDP growth.
All] There Is Still A Long Road Ahead
The trade and construction sectors also eased slightly in the quarter, with engines of economic growth still struggling.
In terms of expenditure, the number increased by 1.6% in the quarter and it is encouraging to see that household expenditure increased by 3.2% – one of the highest growth rates in household expenditure. This compares to significant numbers seen in 2018 and 2017.
This means consumers are not dead despite the increase in VAT and higher petrol prices, which is in line with the rebound in retail sales in the last quarter of 2018. Still makes a nice contribution.
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A broader concern for South Africa remains fixed capital formation, which is currently falling to 2.5%. This shows that despite all the positive talk and policy reforms, the economy is yet to see new investment. Machinery and other equipment fell significantly, an indication that new investment in manufacturing and mining is under pressure. At the same time, the decline in residential buildings, non-residential buildings, construction and overall infrastructure development aspects of the economy, unfortunately, has not yet recovered at this stage.
The decrease in imports and 11% increase in exports is very positive and if the global economy does not slow down, South Africa can benefit from exporting goods to the rest of the world. Along with the 16% drop in imports, this will reduce our current account deficit and possibly the currency somewhat.
The market reacted positively to the number, with the rand rising ten to twelve cents following the announcement, although it later gave back much of its gains.
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As this is the fourth quarter of statistics, information is provided for various provinces and it is interesting to note that the northern part of the country is growing faster than the southern part.
The North West, Limpopo and Mpumalanga each recorded growth of more than 2%, with the Eastern Cape still struggling, followed by the Western Cape.
Much remains to be done, but a start has been made and the direction is upward
Long Road Ahead
Since emerging from recession in the middle of last year, South Africa has seen a modest recovery, with positive economic momentum, particularly in areas such as consumer spending, signaling better days ahead. Although we are still waiting for steady investment recovery, we will look into it after the elections.
It depends on the outcome of the election and whether there are more policies, especially on the land issue, but if South Africa continues this trend, the rate of budget growth can be achieved. If this can be achieved, a virtuous circle of policy implementation leading to further growth can be set in motion.
Over time, we can grow faster than 1.7% population growth and then begin to reduce unemployment and address many of our structural challenges.
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Figures suggest the economy is slowly turning around and the forecast predicted by Finance Minister Tito Mobowen in his budget speech last month is actually a possibility. We can easily see GDP growth of 1.2% to 1.5% in 2019 and then 2% in the next few years.
It is likely to be viewed positively by rating agencies and we expect to maintain a downward revision for now.